2. Trecor Trecor is a computer accessories manufacturer. It plans to launch a new product which will necessitate buying a new machine. The machine will cost £250,000 and will be sold for £150,000 at the end of the product life. The company use straight line depreciation. Sales volumes are anticipated to be 35,000, 40,000, 45,000 and 25,000 for the 4 years of the product life. Each item will sell for £12 and unit variable costs will be £7.80; both of these are in current terms. Additional fixed costs relating to this investment have been estimated at £85,000 pa; this includes an absorption of fixed office overheads (£10,000) which have been allocated to the project. The selling price will inflate at 3% per annum and the variable costs at 4% per annum, while the fixed costs will not change. The company has a nominal cost of capital of 15% and general inflation is forecast to be 5% pa for the next three years. Working capital equal to 5% of sales revenue is required at the start of each year. The company pays tax at 20% and the equipment will qualify for capital allowances at a rate of 18% on a reducing balance basis with a balancing allowance or charge on disposal. Calculate the Net Present Value of the proposed investment and hence advise on its viability.
2. Trecor
Trecor is a computer accessories manufacturer. It plans to launch a new product which will necessitate buying a new machine.
The machine will cost £250,000 and will be sold for £150,000 at the end of the product life. The company use straight line
Sales volumes are anticipated to be 35,000, 40,000, 45,000 and 25,000 for the 4 years of the product life. Each item will sell for £12 and unit variable costs will be £7.80; both of these are in current terms.
Additional fixed costs relating to this investment have been estimated at £85,000 pa; this includes an absorption of fixed office overheads (£10,000) which have been allocated to the project.
The selling price will inflate at 3% per annum and the variable costs at 4% per annum, while the fixed costs will not change. The company has a nominal cost of capital of 15% and general inflation is
Working capital equal to 5% of sales revenue is required at the start of each year.
The company pays tax at 20% and the equipment will qualify for capital allowances at a rate of 18% on a reducing balance basis with a balancing allowance or charge on disposal.
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