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Determine which (if either) of the projects are worth further consideration based on the information given. assuming all cash flows arise at the end of the year to which they relate unless otherwise stated.

Determine which (if either) of the projects are worth further consideration based on the information given. assuming all cash flows arise at the end of the year to which they relate unless otherwise stated.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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3 TWO PROJECTS A company wishes to use a five-year time scale over which to appraise the following projects, with no allowance for scrap values. Its required rate of return is 17%. Project X Purchase of patent rights to a new process at an initial cost of $320,000 payable immediately. The new process will enable the company to reduce its labour force, at present incurring a total wages bill of $280,000, by a quarte: and will allow an increased production capacity of 5,000 units per year of another existing product which at present is sold at $12 per unit with direct costs of $6. There is an 80% chance that the extra potential production could all be sold, with a 20% chance of demand only taking up an extra 3,000 units per year. Production would be adjusted to match demand. This product is made with hardly any labour. Project Y Installation of a mini-computer to deal with the accounting functions at an annual rental charge of $50.000, paid in advance At present the company uses an IT service bureau at a cost of approximately $90.000 per year payable in arrears. This will be run "in parallel" for the first year. The installation will result in staff being sent on a training course during the first year which is expected to cost $10,000, and the employment of a consultant for the first year, to whom $5,000 will be payable in six months' time and another $5,000 in twelve months' time. Required: Determine which (if either) of the projects are worth further consideration based on the information given. assuming all cash flows arise at the end of the year to which they relate unless otherwise stated.
Transcribed Image Text:3 TWO PROJECTS A company wishes to use a five-year time scale over which to appraise the following projects, with no allowance for scrap values. Its required rate of return is 17%. Project X Purchase of patent rights to a new process at an initial cost of $320,000 payable immediately. The new process will enable the company to reduce its labour force, at present incurring a total wages bill of $280,000, by a quarte: and will allow an increased production capacity of 5,000 units per year of another existing product which at present is sold at $12 per unit with direct costs of $6. There is an 80% chance that the extra potential production could all be sold, with a 20% chance of demand only taking up an extra 3,000 units per year. Production would be adjusted to match demand. This product is made with hardly any labour. Project Y Installation of a mini-computer to deal with the accounting functions at an annual rental charge of $50.000, paid in advance At present the company uses an IT service bureau at a cost of approximately $90.000 per year payable in arrears. This will be run "in parallel" for the first year. The installation will result in staff being sent on a training course during the first year which is expected to cost $10,000, and the employment of a consultant for the first year, to whom $5,000 will be payable in six months' time and another $5,000 in twelve months' time. Required: Determine which (if either) of the projects are worth further consideration based on the information given. assuming all cash flows arise at the end of the year to which they relate unless otherwise stated.
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