Q 1

Just Ltd., is engaged in the business of manufacturing and selling a range of different products.
Just Ltd. is assessing the launch of a new product, Product 1X2 using a new machinery. Before
launching the new product, the company has done a market research spending Rs.2 million. The
new machinery is expected to cost Rs. 80 million with a 5-year useful life time. The capital
allowances can be claimed at 25% per annum for the tax purpose and depreciation is calculated
on the straight-line basis at cost for accounting purpose. The working capital investment is
expected to be Rs. 8 million. The following number of units have been forecasted to be produced
using the new machinery and sold during the 5-year period:
Year Number of Units
1 24000
2 27000
3 32000
4 32000
5 28000
The product is expected to be introduced at an introductory price of Rs.3,600/- per unit for the
first year. For Year 2, the price per unit is expected to be increased to Rs.4,000/- per unit.
Thereafter the price is to be adjusted based on the estimated inflation of 10% per annum. The
variable production cost per unit in Year 1 is Rs.1,000/- and is expected to increase at 10% per
annum thereafter. Fixed overheads including depreciation is estimated to be Rs. 45 million per
annum. During Year 1, Rs. 10 million is expected to be spent on the initial marketing phase and
selling and distribution expenses are expected to be 8% of the sales revenue per annum from year
2 onwards. The company pays income tax at the rate of 30% per annum and it should be paid in
the same year. The cost of capital of the company is 20% per annum.
You are required to:
Calculate the Net Present Value (NPV) of the investment
Assess whether the company should launch the new product using the new machinery.
Imo Ltd. is considering investing in a new project which involves developing and selling of
an innovative gadget targeting youth below 25 years. For this, the company expects to
invest Rs.125 million for a special machinery and Rs.3 million for working capital
requirement.
For the next 5 years, sales and advertising costs will be expected to be as follows:
Year Production/Sales Selling Price per Advertising Cost per
(Units) Unit (Rs) Annum (Rs)
1 7000 11000 8,000,000
2 11000 10500 23,000,000
3 18000 9500 15,000,000
4 20000 9000 15,000,000
5 15000 8500 4,000,000
The machinery has a lifetime of 5 years and the company depreciates its’ machineries
under the straight-line basis at cost. The company is eligible to claim capital allowance at
the rate of 25% per annum on the machinery.
The variable production cost other than advertising cost is expected to be Rs.4,000/- per
unit and the fixed overhead cost including depreciation on machinery is expected to be
Rs.37 million per annum. Working capital can be recovered at the end of the 5th year.
The company pays income tax at the rate of 24% per annum and it should be paid in the
same year. Imo Ltd.’s cost of capital is 10% per annum.
You are required to:
(a) Calculate the Net Present Value (NPV) of the new project.
(b) Assess the viability of the above project based on NPV.
PV Co, a large stock-exchange-listed company, is evaluating an investment proposal to
manufacture Product W33, which has performed well in test marketing trials conducted
recently by the company’s research and development division. Product W33 will be
manufactured using a fully-automated process which would significantly increase noise
levels from PV Co’s factory. The following information relating to this investment proposal
has now been prepared:
Initial investment LKR2 million
Selling price (current price terms) LKR20 per unit
Expected selling price inflation 3% per year
Variable operating costs (current price terms) LKR8 per unit
Fixed operating costs (current price terms) LKR170,000 per year
Expected operating cost inflation 4% per year
The research and development division has prepared the following demand forecast as a
result of its test marketing trials. The forecast reflects expected technological change and
its effect on the anticipated life-cycle of Product W33.
Year 1 2 3 4
Demand (units) 60,000 70,000 120,000 45,000
It is expected that all units of Product W33 produced will be sold, in line with the
company’s policy of keeping no inventory of finished goods. No terminal value or
machinery scrap value is expected at the end of four years, when production of Product
W33 is planned to end. For investment appraisal purposes, PV Co uses a nominal (money)
discount rate of 10% per year and a target return on capital employed of 30% per year.
Ignore taxation.
Required:
(a) Calculate the following values for the investment proposal:
(i) net present value;
(ii) internal rate of return; and
(iii) return on capital employed (accounting rate of return) based on average
investment.
(b) Briefly discuss your findings in each section of (a) above and advise whether the
investment proposal is financially acceptable.
(c) Discuss how the objectives of PV Co’s stakeholders may be in conflict if the project is
undertaken.

Q 1

Uploaded by

Copyright:

Available Formats

Q 1

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Q 1

Uploaded by

Copyright:

Available Formats

Just Ltd., is engaged in the business of manufacturing and selling a range of different products.

You might also like