Loki Bhd is a profitable medium-sized toy manufacturer. It is considering an investment in a new machine, with a maximum output of 250,000 units per annum, in order to manufacture a new toy. Market research undertaken for the company indicated a link between selling price and demand, and the research agency involved has suggested a sales strategy that could be implemented, as follows: Selling price (in current price terms) Sales volume in first year Annual increase in sales volume after first year Sales Strategy RM7.00 per unit 115,000 units 15% Required: Loki Bhd expects economies of scale to reduce the variable cost per unit as the level of production increases. When 100,000 units are produced in a year, the variable cost per unit is expected to be RM3.00 (in current price terms). For each additional 10,000 units produced in excess of 100,000 units, a reduction in average variable cost per unit of RM0.05 is expected to occur. The average variable cost per unit when production is between 110,000 units and 119,999 units for example, is expected to be RM2.95 (in current price terms); and the average variable cost per unit when production is between 120,000 units and 129,999 units is expected to be RM2.90 (in current price terms), and so on. The new machine would cost RM1,600,000 and would not be expected to have any re-sale value at the end of its life. Capital allowance would be available on the investment on a 25% reducing balance basis. Although the machine may have a longer useful economic life, Loki Bhd uses a five-year planning period for all investment projects. The company pays tax at an annual rate of 30% and settles tax liabilities in the year in which they arise. Operation of the new machine will cause fixed costs to increase by RM110,000 (in current price terms). Inflation is expected to increase these costs by 4% per year. Annual inflation on the selling price and unit variable costs is expected to be 3% per year. For profit reporting purposes Loki Bhd depreciates machinery on a straight-line basis over its planning period. Loki Bhd has an average cost of capital of 10% in money terms. Required: Calculate the net present value and accounting rate of return of the planned investment project.
Loki Bhd is a profitable medium-sized toy manufacturer. It is considering an investment in a new machine, with a maximum output of 250,000 units per annum, in order to manufacture a new toy. Market research undertaken for the company indicated a link between selling price and demand, and the research agency involved has suggested a sales strategy that could be implemented, as follows: Selling price (in current price terms) Sales volume in first year Annual increase in sales volume after first year Sales Strategy RM7.00 per unit 115,000 units 15% Required: Loki Bhd expects economies of scale to reduce the variable cost per unit as the level of production increases. When 100,000 units are produced in a year, the variable cost per unit is expected to be RM3.00 (in current price terms). For each additional 10,000 units produced in excess of 100,000 units, a reduction in average variable cost per unit of RM0.05 is expected to occur. The average variable cost per unit when production is between 110,000 units and 119,999 units for example, is expected to be RM2.95 (in current price terms); and the average variable cost per unit when production is between 120,000 units and 129,999 units is expected to be RM2.90 (in current price terms), and so on. The new machine would cost RM1,600,000 and would not be expected to have any re-sale value at the end of its life. Capital allowance would be available on the investment on a 25% reducing balance basis. Although the machine may have a longer useful economic life, Loki Bhd uses a five-year planning period for all investment projects. The company pays tax at an annual rate of 30% and settles tax liabilities in the year in which they arise. Operation of the new machine will cause fixed costs to increase by RM110,000 (in current price terms). Inflation is expected to increase these costs by 4% per year. Annual inflation on the selling price and unit variable costs is expected to be 3% per year. For profit reporting purposes Loki Bhd depreciates machinery on a straight-line basis over its planning period. Loki Bhd has an average cost of capital of 10% in money terms. Required: Calculate the net present value and accounting rate of return of the planned investment project.
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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Transcribed Image Text:QUESTION 1
Loki Bhd is a profitable medium-sized toy manufacturer. It is considering an
investment in a new machine, with a maximum output of 250,000 units per annum,
in order to manufacture a new toy. Market research undertaken for the company
indicated a link between selling price and demand, and the research agency
involved has suggested a sales strategy that could be implemented, as follows:
Selling price (in current price terms)
Sales volume in first year
Annual increase in sales volume after first year
Sales Strategy
RM7.00 per unit
115,000 units
15%
Required:
Loki Bhd expects economies of scale to reduce the variable cost per unit as the
level of production increases. When 100,000 units are produced in a year, the
variable cost per unit is expected to be RM3.00 (in current price terms). For each
additional 10,000 units produced in excess of 100,000 units, a reduction in average
variable cost per unit of RM0.05 is expected to occur. The average variable cost
per unit when production is between 110,000 units and 119,999 units for example,
is expected to be RM2.95 (in current price terms); and the average variable cost
per unit when production is between 120,000 units and 129,999 units is expected
to be RM2.90 (in current price terms), and so on.
| The new machine would cost RM1,600,000 and would not be expected to have
any re-sale value at the end of its life. Capital allowance would be available on the
investment on a 25% reducing balance basis. Although the machine may have a
|longer useful economic life, Loki Bhd uses a five-year planning period for all
investment projects. The company pays tax at an annual rate of 30% and settles
tax liabilities in the year in which they arise.
Operation of the new machine will cause fixed costs to increase by RM110,000
(in current price terms). Inflation is expected to increase these costs by 4% per
year. Annual inflation on the selling price and unit variable costs is expected to be
3% per year. For profit reporting purposes Loki Bhd depreciates machinery on a
straight-line basis over its planning period. Loki Bhd has an average cost of capital
of 10% in money terms.
Required:
Calculate the net present value and accounting rate of return of the planned
investment project.
а.
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