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.
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.
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
Related questions
Question
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
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education