Melan Co. is considering a new gin distillery investment in Surrey for five years. The company has spent £0.2 million on a feasibility study during the last two months. The study reports that the company will be required to purchase a site in Surrey for £2.6 million. It is estimated that the site can be sold for £2.7 million at the end of the project. The study also reports that the company will be required to purchase new machinery and equipment for £5.5 million in order to operate the distillery and that these assets can be sold for £2.5 million at the end of the project. The following projected figures for each year of the life of the project has been prepared: Year 1 2 3 4 5 £m £m £m £m £m Sales revenue 6.2 6.6 6.9 6.1 6.7 Costs 2.1 2.2 2.4 2.3 2.2 The following additional information is also available: • The investment project will require an investment of £0.8 million of working capital at the beginning of the project. This amount will be released at the end of the investment period. • The machinery and equipment will be depreciated using straight-line method over the life of the project. The projected costs shown above do not include depreciation. • The costs shown above do not include any allocation for a fair share of the general business overheads. The company intends to allocate £0.3 million per year to the project. These overheads will be incurred whether or not Melan Co. accept or reject this new investment project. • The costs shown above include interest charges of £0.06 million per year. The new investment will be financed partly by a loan. • If Melan Co. accept this investment project, the sales of an existing similar project will decline resulting in a loss of contribution of £0.9 million per year. • The projected costs shown above include supervisory salaries of £0.15 per year. People who will receive these salaries have recently been identified as members of staff already employed in the business. To carry out their new task, they will be taken off current duties and replaced with new employees at a cost of £0.13 per year. The company has a cost of capital of 10%. Required: Calculate the Net Present Value (NPV) for the above project stating if the project should be undertaken or not giving reasons for your choice. Show calculations
Melan Co. is considering a new gin distillery investment in Surrey for five
years. The company has spent £0.2 million on a feasibility study during the
last two months. The study reports that the company will be required to
purchase a site in Surrey for £2.6 million. It is estimated that the site can be
sold for £2.7 million at the end of the project. The study also reports that the
company will be required to purchase new machinery and equipment for £5.5
million in order to operate the distillery and that these assets can be sold for
£2.5 million at the end of the project.
The following projected figures for each year of the life of the project has
been prepared:
Year
1 2 3 4 5
£m £m £m £m £m
Sales revenue 6.2 6.6 6.9 6.1 6.7
Costs 2.1 2.2 2.4 2.3 2.2
The following additional information is also available:
• The investment project will require an investment of £0.8 million of
working capital at the beginning of the project. This amount will be
released at the end of the investment period.
• The machinery and equipment will be
method over the life of the project. The projected costs shown
above do not include depreciation.
• The costs shown above do not include any allocation for a fair share
of the general business overheads. The company intends to allocate
£0.3 million per year to the project. These overheads will be
incurred whether or not Melan Co. accept or reject this new
investment project.
• The costs shown above include interest charges of £0.06 million per
year. The new investment will be financed partly by a loan.
• If Melan Co. accept this investment project, the sales of an existing
similar project will decline resulting in a loss of contribution of £0.9
million per year.
• The projected costs shown above include supervisory salaries of
£0.15 per year. People who will receive these salaries have recently
been identified as members of staff already employed in the
business. To carry out their new task, they will be taken off current
duties and replaced with new employees at a cost of £0.13 per year.
The company has a cost of capital of 10%.
Required:
Calculate the
project should be undertaken or not giving reasons for your choice.
Show calculations
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