Kako Ltd is considering introducing a new product unto the market. This will require the injection of capital to the tune of GH¢20,000 for the purchase of the equipment for production. The cost of the building that Kako Ltd intends to use for the project is GH¢30,000. The Production and Marketing department has presented the information in the table below: 2019 Variable cost per unit of the product GH¢2 Selling price per unit GH¢6 Quantity 4000 units per annum
Kako Ltd is considering introducing a new product unto the market. This will require the injection of capital to the tune of GH¢20,000 for the purchase of the equipment for production. The cost of the building that Kako Ltd intends to use for the project is GH¢30,000. The Production and Marketing department has presented the information in the table below: 2019 Variable cost per unit of the product GH¢2 Selling price per unit GH¢6 Quantity 4000 units per annum
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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Kako Ltd is considering introducing a new product unto the market. This will require the injection of capital to the tune of GH¢20,000 for the purchase of the equipment for production. The cost of the building that Kako Ltd intends to use for the project is GH¢30,000. The Production and Marketing department has presented the information in the table below:
|
|
2019 |
|
Variable cost per unit of the product |
GH¢2 |
|
Selling price per unit |
GH¢6 |
|
Quantity |
4000 units per annum |
Again the following information should be taken not of:
- Feasibility studies cost the company GH¢2000
- Test marketing expenses amounts to GH¢3000
- Variable cost will increase by 5% per annum
- Selling price will increase by 10% per annum
- Marketing expense will be 5% of sales revenue per year
- An initial working capital investment of GH¢2000 will be made. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final year of the project, net working capital will decline to zero as the project is wound down. In other words, the investment in working capital is to be completely recovered by the end of the project’s life
- As a result of the introduction of the new product, sales of existing products will drop by 1000 units per annum. The selling price per unit of existing products is GH¢5 while the variable cost is GH¢ 4.
- Overhead cost will be fixed at GH¢6000 per year
- The project will last for five years (2019-2023) and the machines will be sold for a scrap value of GH¢2000
- Charge
depreciation using the straight line method - CPC falls within the 25% tax bracket
- The project cost of capital is 15%
Required:
Evaluate the project using NPV and advise the Management of Kako Ltd whether or not it should introduce the new product.
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