Henning Ltd is involved in the manufacture of pharmaceutical products and is currently considering an investment in a new production facility. The proposal would involve an initial investment in capital assets of £1,500,000 and projected increased annual sales revenues as a result of the investment would be as follows: Year Sales 1 £2,500,000 2 £2,625,000 3 £2,700,000 4 £2,500,000 5 £2,250,000 Variable costs amount to 50% of sales value. Annual fixed overheads as a result of the investment will amount to £680,000. This figure excludes depreciation, but does include an allocation of general overheads, which are not expected to increase as a result of undertaking this project, amounting to £20,000 per annum. The capital assets will be depreciated on a straight line basis over the five years assuming a nil residual value. The company expects to incur training and development expenses of £50,000 in the first year and £20,000 per year thereafter. The company estimates that an additional investment of £50,000 in working capital will be required and it is estimated that 80% of this would be recoverable at the end of 5 years. The company’s cost of capital is estimated to be 14% and Henning Ltd normally seeks a payback on investment within 4 years. Required: (a) Calculate each of the following for the investment proposal: (i) The net present value for the project. (ii) The payback period. (Include working capital requirement as part of the initial investment)
Henning Ltd is involved in the manufacture of pharmaceutical products and is currently considering an investment in a new production facility. The proposal would involve an initial investment in capital assets of £1,500,000 and projected increased annual sales revenues as a result of the investment would be as follows: Year Sales 1 £2,500,000 2 £2,625,000 3 £2,700,000 4 £2,500,000 5 £2,250,000 Variable costs amount to 50% of sales value. Annual fixed overheads as a result of the investment will amount to £680,000. This figure excludes depreciation, but does include an allocation of general overheads, which are not expected to increase as a result of undertaking this project, amounting to £20,000 per annum. The capital assets will be depreciated on a straight line basis over the five years assuming a nil residual value. The company expects to incur training and development expenses of £50,000 in the first year and £20,000 per year thereafter. The company estimates that an additional investment of £50,000 in working capital will be required and it is estimated that 80% of this would be recoverable at the end of 5 years. The company’s cost of capital is estimated to be 14% and Henning Ltd normally seeks a payback on investment within 4 years. Required: (a) Calculate each of the following for the investment proposal: (i) The net present value for the project. (ii) The payback period. (Include working capital requirement as part of the initial investment)
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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Cost of Common Stock
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Question
Henning Ltd is involved in the manufacture of pharmaceutical products and is currently considering an investment in a new production facility. The proposal would involve an initial investment in capital assets of £1,500,000 and projected increased annual sales revenues as a result of the investment would be as follows:
Year Sales
1 £2,500,000
2 £2,625,000
3 £2,700,000
4 £2,500,000
5 £2,250,000
Variable costs amount to 50% of sales value. Annual fixed overheads as a result of the investment will amount to £680,000. This figure excludes depreciation, but does include an allocation of general overheads, which are not expected to increase as a result of undertaking this project, amounting to £20,000 per annum. The capital assets will be depreciated on a straight line basis over the five years assuming a nil residual value. The company expects to incur training and development expenses of £50,000 in the first year and £20,000 per year thereafter.
The company estimates that an additional investment of £50,000 in working capital will be required and it is estimated that 80% of this would be recoverable at the end of 5 years.
The company’s cost of capital is estimated to be 14% and Henning Ltd normally seeks a payback on investment within 4 years.
Required:
(a) Calculate each of the following for the investment proposal:
(i) The net present value for the project.
(ii) The payback period. (Include working capital requirement as part of
the initial investment)
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