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    Hope Electronics LTD Case 2017

    Uploaded by

    Shelly Teh

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    © All Rights Reserved
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    Hope Electronics LTD Case 2017

    Uploaded by

    Shelly Teh
    3 views3 pages

    Original Title

    Hope Electronics Ltd Case 2017

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    3 views3 pages

    Hope Electronics LTD Case 2017

    Uploaded by

    Shelly Teh

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    1

    CASE STUDY

    HOPE ELECTRONICS LTD - A


    Mark Whittington1 and Ken Bates2
    _____________________________________________

    _____________________________________________

    BACKGROUND

    Hope Electronics Ltd is an established company which has continued to be


    profitable in recent years despite operating at below full capacity. Continued
    investment in research and development has produced a new innovative
    product, the microwave drier, which is able to dry most garments at
    considerably lower cost than conventional tumble driers. Market research
    supports the proposed price of £400 per drier with the following predicted sales
    over the next five years:

    Year Unit Sales


    1 20,000
    2 30,000
    3 35,000
    4 42,000
    5 40,000

    1 Senior Lecturer at University of Aberdeen Business School


    2 Lecturer at Victoria University of Wellington, New Zealand

    Hope - A  M Whittington & K Bates


    2

    The company accountant has collated the following costing information


    relating to the drier proposal:

    £’000s
    Research and Development Costs incurred to date 200
    Additional pre-production development costs 800
    Capital cost of production machinery 6,700
    Resale value of machinery after 5 years 300

    Due to the additional manufacturing and selling activity Hope’s working


    capital requirements will increase by £200,000 at the start of the project, with
    further increases at the end of each year (in preparation for increased activity
    in the subsequent year) as follows: end of year 1, £200,000; end of year 2,
    £300,000; end of year 3, £400,000; end of year 4, £500,000. This additional
    working capital is assumed to be recovered in full at the end of year 5.

    £ per drier £000s


    per annum

    Manufacturing Costs
    Direct Labour 75
    Direct Materials 75
    Variable Overheads 75
    Depreciation of Machinery 1,280
    Amortisation of R&D costs 200
    Other fixed costs (Note 1) 1,200
    Selling and Distribution Costs
    Variable 25
    Fixed (Note 2) 300

    Note 1 To increase output above 38,000 driers shift working


    will be introduced and annual fixed manufacturing costs
    will rise by £600,000.

    Note 2 Annual fixed selling and distribution costs will need to


    increase by £100,000 for sales to exceed 33,000 driers
    and a further £100,000 for sales to exceed 38,000 driers.

    The accountant has specifically excluded all costs relating to the factory unit
    in which the new machinery will be installed and operated. She explains that
    this unit is on a short lease which has only 7 years left to run and Hope
    Electronics pays £1,500,000 per annum rental. There is no prospect of Hope
    using this unit unless the current project is accepted. Whilst Hope Electronics
    has not been using this unit, part of it has been sub-let to a neighbouring
    company for use as a warehouse at a monthly rent of £100,000. This
    arrangement could continue until the lease expires.

    Hope - A  M Whittington & K Bates


    3

    If the drier project goes ahead Hope can initially share the factory unit with the
    lease but the rental income will fall to £50,000 per month. Once output exceeds
    30,000 units Hope will need additional packing and storage space, so rent will
    be reduced to £25,000 per month. If output exceeds 38,000 driers Hope will
    need the whole factory unit and will lose all rental income.

    Given its critical nature you have been called in as a consultant to advise
    Hope’s board of directors with respect to this project. Hope normally ignores
    tax and inflation when considering such capital assessments and uses a
    discount rate of 12%.

    REQUIRED:

    1. Prepare your presentation to the board of Hope Electronics Ltd advising


    whether or not to go ahead with this project based on the payback period
    appraisal method and taking into consideration that Hope has some short
    term liquidity problems. (Ignore tax and inflation). Include advice on the
    strengths and weaknesses of the appraisal technique you have used in
    assessing the microwave tumble drier project.

    2. Prepare your presentation to the board of Hope Electronics Ltd advising


    whether or not to go ahead with this project based on the Net Present Value
    appraisal method (Ignore tax and inflation). Include advice on the
    strengths and weaknesses of the appraisal technique you have used in
    assessing the microwave tumble drier project.

    3. As the microwave drier uses new technology this is a relatively high risk
    project. Explain how this risk might be reflected in the project appraisal,
    and how your advice may be amended as a result of appropriate
    consideration of the specific risks of this project.

    _____________________________________________

    _____________________________________________

    Hope - A  M Whittington & K Bates

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