Finance John and John Plc. is a midsized electronics manufacturing company in the West of Scotland. You have recently joined as a finance manager at John and John. Last week, the marketing manager brought a new project to your attention. This project is about manufacturing robot vacuum cleaners ETX600 with an expected product life cycle of 4 years. In 2019, John and John Plc plans to launch these new vacuum cleaners if the project is financially feasible. Research and development costs incurred in the past three years amount to £150,000. Advertising is expected to cost £25,000 in year 1. Advertising costs will reduce by 10% every year thereafter. The company expects that sales in the first year will be £800,000, second and third year sales will be £650,000 and sales in the fourth year will be £600,000. Variable costs will be 50% of sales each year and the fixed production cost is expected to be £100,000 per year. The company estimates that if these new robot vacuum cleaners are released in the market, it will affect the sales of its previous non-robot models. The marketing team has estimated a loss contribution of £25,000 per year for non-robot models ETX500 and ETX550. John and John’s existing facilities are not adequate to produce the new vacuum cleaners. Therefore, it plans to purchase new equipment which will cost £350,000. Shipping costs and installation costs of the equipment are £20,000 and £15,000 respectively. The new equipment’s estimated residual value is £15,000 at the end of 4 years. Capital allowances can be claimed on this investment on a 25% reducing balance basis. Head office costs are expected to grow by £20,000 every year of the project’s life as a result of manufacturing the robot vacuum cleaner. However, the accounting department allocation system will allocate £50,000 to all projects. Working capital requirements for each year of this new project are: £35,000 in year 1, £26,000 in year 2, £35,000 in year 3. John and John’s cost of capital is 12% and it pays corporate tax at a rate of 40%. REQUIRED: • Prepare a statement of after-tax cash flows attributable to the project for each year of the new product’s life cycle.
Finance
John and John Plc. is a midsized electronics manufacturing company in the West of Scotland. You have recently joined as a finance manager at John and John. Last week, the marketing manager brought a new project to your attention. This project is about manufacturing robot vacuum cleaners ETX600 with an expected product life cycle of 4 years. In 2019, John and John Plc plans to launch these new vacuum cleaners if the project is financially feasible. Research and development costs incurred in the past three years amount to £150,000. Advertising is expected to cost £25,000 in year 1. Advertising costs will reduce by 10% every year thereafter. The company expects that sales in the first year will be £800,000, second and third year sales will be £650,000 and sales in the fourth year will be £600,000. Variable costs will be 50% of sales each year and the fixed production cost is expected to be £100,000 per year. The company estimates that if these new robot vacuum cleaners are released in the market, it will affect the sales of its previous non-robot models. The marketing team has estimated a loss contribution of £25,000 per year for non-robot models ETX500 and ETX550.
John and John’s existing facilities are not adequate to produce the new vacuum cleaners. Therefore, it plans to purchase new equipment which will cost £350,000. Shipping costs and installation costs of the equipment are £20,000 and £15,000 respectively. The new equipment’s estimated residual value is £15,000 at the end of 4 years. Capital allowances can be claimed on this investment on a 25% reducing balance basis. Head office costs are expected to grow by £20,000 every year of the project’s life as a result of manufacturing the robot vacuum cleaner. However, the accounting department allocation system will allocate £50,000 to all projects. Working capital requirements for each year of this new project are: £35,000 in year 1, £26,000 in year 2, £35,000 in year 3. John and John’s cost of capital is 12% and it pays corporate tax at a rate of 40%.
REQUIRED:
• Prepare a statement of after-tax cash flows attributable to the project for each year of the new product’s life cycle.
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