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Degnis

Degnis Co is a company which installs kitchens and bathrooms to customer specifications. It is planning to invest $4,000,000 in a new facility to convert vans and trucks into motorhomes. Each motorhome will be designed and built according to customer requirements.

Degnis Co expects motorhome production and sales in the first four years of operation to be as follows.

Year 1 2 3 4
Motorhomes produced and sold 250 300 450 450

 

The selling price for a motorhome depends on the van or truck which is converted, the quality of the units installed and the extent of conversion work required. Degnis Co has undertaken research into likely sales and costs of different kinds of motorhomes which could be selected by customers, as follows:

Motorhome type: Basic Standard Deluxe
Probability of selection 20% 45% 35%
Selling price ($/unit) 30,000 42,000 72,000
Conversion cost ($/unit) 23,000 29,000 40,000

 

Fixed costs of the production facility are expected to depend on the volume of motorhome production as follows:

Production volume (units/year)   200-299     300-399     400-499  
Fixed cost ($000/year) 4,000 5,000 5,500

 

Degnis Co pays corporation tax of 28% per year, with the tax liability being settled in the year in which it arises. The company can claim tax allowable depreciation on the cost of the investment on a straight-line basis over ten years.

Degnis Co evaluates investment projects using an after-tax discount rate of 11%.

Requirements:

a

(i) Calculate the expected net present value of the planned investment for the first four years of operation. (7 marks)

(ii) After the fourth year of operation, Degnis Co expects to continue to produce and sell 450 motorhomes per year for the foreseeable future.

Required:

Calculate the effect on the expected net present value of the planned investment of continuing to produce and sell motorhomes beyond the first four years and comment on the financial acceptability of the planned investment. (3 marks)

Marks: 10
b

Critically discuss the use of probability analysis in incorporating risk into investment appraisal.

Marks: 5
c

Discuss the reasons why investment finance may be limited, even when a company has attractive investment opportunities available to it.

Marks: 5

Answers submitted

Created by Ref Marking Action
Rakhi Gupta's picture
Rakhi Gupta
11/15/2020 - 20:25
a
10160
10
Rakhi Gupta's picture
Rakhi Gupta
11/15/2020 - 20:30
b
10162
5
Rakhi Gupta's picture
Rakhi Gupta
11/15/2020 - 20:33
c
10164
5
Rakhi Gupta's picture
Rakhi Gupta
10/21/2020 - 08:46
a
9880
10
Rakhi Gupta's picture
Rakhi Gupta
10/21/2020 - 09:16
b
9882
5
Rakhi Gupta's picture
Rakhi Gupta
10/21/2020 - 09:39
c
9884
5
Rakhi Gupta's picture
Rakhi Gupta
10/17/2020 - 16:40
a
9832
10
Kamrunnahar Takia's picture
Kamrunnahar Takia
06/07/2020 - 22:00
a
9198
10
Apurba nandy's picture
Apurba nandy
03/02/2020 - 12:05
a
8960
10
Apurba nandy's picture
Apurba nandy
03/02/2020 - 12:45
b
8962
5
Apurba nandy's picture
Apurba nandy
12/03/2019 - 13:53
a
5972
10
Apurba nandy's picture
Apurba nandy
12/03/2019 - 14:19
a
8360
10
Tanzeer UL Alaam's picture
Tanzeer UL Alaam
11/28/2019 - 22:13
a
7430
10
Tanzeer UL Alaam's picture
Tanzeer UL Alaam
11/28/2019 - 22:08
a
8248
10
Tanzeer UL Alaam's picture
Tanzeer UL Alaam
11/26/2019 - 00:03
a
8122
10
Sohel Miah's picture
Sohel Miah
10/02/2019 - 17:11
b
7512
5
Sohel Miah's picture
Sohel Miah
10/02/2019 - 17:12
c
7514
5