Frank limited is considering buying a new machine which would have a useful life of 5 years at a cost of Gh¢ 100,000 and scrap value of Gh¢ 5,000. The machine will produce 50,000 units per annum of a new product with an estimated selling price of Gh¢3 per unit. Direct cost would be Gh¢ 1.75 per unit and annual fix cost including depreciation calculated on a straight line method would be Gh¢ 40,000. p.a. In years 1 and 2, special sales promotion expenditure, not included in the above costs would be incurred amounting to Gh¢ 10,000 and GH¢ 15,000 respectively. As a consequence of this project, investment by the company on debtors and stocks would increase during year 1 by Gh¢ 15,000 and Gh¢ 20,000 respectively and creditors would increase by Gh¢ 10,000 and would revert to their previous levels. Requirement Evaluate the project using the N.P.V method of investment appraisal, assuming the cost of capital is 10%. PRESENT VALUE FACTORS AT 20% Year Discounting factor Annuity factor 1 0.909 0.909 2 0.826 1.736 3 0.751 2.487 4 0.683 3.170 5 0.621 3.791
QUESTION TWO (2)
Frank limited is considering buying a new machine which would have a useful life of 5 years at a cost of Gh¢ 100,000 and scrap value of Gh¢ 5,000. The machine will produce 50,000 units per annum of a new product with an estimated selling price of Gh¢3 per unit. Direct cost would be Gh¢ 1.75 per unit and annual fix cost including
In years 1 and 2, special sales promotion expenditure, not included in the above costs would be incurred amounting to Gh¢ 10,000 and GH¢ 15,000 respectively. As a consequence of this project, investment by the company on debtors and stocks would increase during year 1 by Gh¢ 15,000 and Gh¢ 20,000 respectively and creditors would increase by Gh¢ 10,000 and would revert to their previous levels.
Requirement
Evaluate the project using the
Year Discounting factor
1 0.909 0.909
2 0.826 1.736
3 0.751 2.487
4 0.683 3.170
5 0.621 3.791
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