VKC is evaluating an investment proposal to manufacture Product AB, which has performed well in test marketing trialsconducted recently by the company's research and development division. The following information relating to thisinvestment proposal has now been prepared. Initial investment RM2 million Selling price (current price terms) RM20 perunit Expected selling price inflation 3% per year Variable operating costs (current price terms) RM8 per unit Fixedoperating costs (current price terms) RM170,000 per year Expected operating cost inflation 4% per year The researchand development division has prepared the following demand forecast because of its test marketing trials. The forecastreflects expected technological change and its effect on the anticipated life-cycle of Product AB. \table[[Year, 1, 2, 3, 4], [Demand (units), 60.000, 70.000, 120.000, 45.000]] It is expected that all units of Product AB produced will be sold, in linewith the company's policy of keeping no inventory of finished goods. No terminal value or machinery scrap value isexpected at the end of four years, when production of Product AB is planned to end. For investment appraisal purposes,VKC uses a nominal (money) discount rate of 10% per year and a target return on capital employed of 30% per year.Ignore taxation. Required: a) Identify and explain the key stages in the capital investment decision-making process, andthe role of investment appraisal in this process. b) Calculate the following values for the investment proposal: i) netpresent value; ii) internal rate of return; iii) return on capital employed (accounting rate of return) based on averageinvestment; iv) discounted payback period. c) Discuss your findings in each section of (b) above and advise whether theinvestment proposal is financially acceptable.cYear1234Demand (units) 60.000 70.000120.00045.000

Investment involves allocating resources, often money, with the expectation of future returns, such…

expected at the end of four years, when production of Product AB is planned to end. For investment appraisal purposes, VKC uses a nominal (money) discount rate of 10% per year and a target return on capital employed of 30% per year. Ignore taxation. Required: a) Identify and explain the key stages in the capital investment decision-making process, and the role of investment appraisal in this process. b) Calculate the following values for the investment proposal: i) net present value; ii) internal rate of return; iii) return on capital employed (accounting rate of return) based on average investment; iv) discounted payback period. c) Discuss your findings in each section of (b) above and advise whether the investment proposal is financially acceptable.

expected at the end of four years, when production of Product AB is planned to end. For investment appraisal purposes, VKC uses a nominal (money) discount rate of 10% per year and a target return on capital employed of 30% per year. Ignore taxation. Required: a) Identify and explain the key stages in the capital investment decision-making process, and the role of investment appraisal in this process. b) Calculate the following values for the investment proposal: i) net present value; ii) internal rate of return; iii) return on capital employed (accounting rate of return) based on average investment; iv) discounted payback period. c) Discuss your findings in each section of (b) above and advise whether the investment proposal is financially acceptable.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

VKC is evaluating an investment proposal to manufacture Product AB, which has performed well in test marketing trials
conducted recently by the company's research and development division. The following information relating to this
investment proposal has now been prepared. Initial investment RM2 million Selling price (current price terms) RM20 per
unit Expected selling price inflation 3% per year Variable operating costs (current price terms) RM8 per unit Fixed
operating costs (current price terms) RM170,000 per year Expected operating cost inflation 4% per year The research
and development division has prepared the following demand forecast because of its test marketing trials. The forecast
reflects expected technological change and its effect on the anticipated life-cycle of Product AB. \table[[Year, 1, 2, 3, 4], [
Demand (units), 60.000, 70.000, 120.000, 45.000]] It is expected that all units of Product AB produced will be sold, in line
with the company's policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is
expected at the end of four years, when production of Product AB is planned to end. For investment appraisal purposes,
VKC uses a nominal (money) discount rate of 10% per year and a target return on capital employed of 30% per year.
Ignore taxation. Required: a) Identify and explain the key stages in the capital investment decision-making process, and
the role of investment appraisal in this process. b) Calculate the following values for the investment proposal: i) net
present value; ii) internal rate of return; iii) return on capital employed (accounting rate of return) based on average
investment; iv) discounted payback period. c) Discuss your findings in each section of (b) above and advise whether the
investment proposal is financially acceptable.
c
Year
1
2
3
4
Demand (units) 60.000 70.000
120.000
45.000

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