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Vip 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 Vip Co's factory. The following information relating to this investment proposal has now been prepared:

 

Initial investment

$2 million

Selling price (current price terms)

$20 per unit

Expected selling price inflation

3% per year

Variable operating costs (current price terms)

$8 per unit

Fixed operating costs (current price terms)

     $170,000 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, Vip Co uses a nominal (money) discount rate of 10% per year and a target return on capital employed of 30% per year. Ignore taxation.

Requirements:

a

Calculate the following values for the investment proposal:

 (i) net present value;  

(5 marks)

 

(ii) internal rate of return;

(3 marks)

 

(iii) return on capital employed (accounting rate of return) based on average investment.  

(3 marks)

Marks: 11
b

Briefly discuss your findings in each section of (a) previously and advise whether the investment proposal is financially acceptable.

Marks: 4
c

Discuss how the objectives of Vip Co's stakeholders may be in conflict if the project is undertaken.  

Marks: 5

Answers submitted

Created by Ref Marking Action
Apurba nandy's picture
Apurba nandy
03/01/2020 - 11:28
a
8888
11
Apurba nandy's picture
Apurba nandy
03/01/2020 - 11:29
b
8890
4
Apurba nandy's picture
Apurba nandy
12/02/2019 - 22:28
a
6302
11
Apurba nandy's picture
Apurba nandy
12/02/2019 - 22:27
a
8340
11
MD. Mahmudul hoque's picture
MD. Mahmudul hoque
11/24/2019 - 21:55
a
8160
11
MD. Mahmudul hoque's picture
MD. Mahmudul hoque
11/24/2019 - 22:24
b
8166
4
MD. Mahmudul hoque's picture
MD. Mahmudul hoque
11/24/2019 - 22:47
c
8168
5
Sohel Miah's picture
Sohel Miah
10/03/2019 - 11:38
b
7528
4
Subrata Banik's picture
Subrata Banik
09/06/2019 - 12:09
a
7284
11
Md. Mahmudul Hasan Shimul's picture
Md. Mahmudul Ha...
05/30/2019 - 12:10
a
6492
11
Md. Mahmudul Hasan Shimul's picture
Md. Mahmudul Ha...
05/30/2019 - 12:24
b
6496
4
Md. Mahmudul Hasan Shimul's picture
Md. Mahmudul Ha...
05/30/2019 - 12:45
c
6498
5
Md Hasan Uz Zaman's picture
Md Hasan Uz Zaman
05/26/2019 - 22:33
a
6430
11
Md Hasan Uz Zaman's picture
Md Hasan Uz Zaman
05/26/2019 - 22:09
a
6288
11
Md Hasan Uz Zaman's picture
Md Hasan Uz Zaman
05/26/2019 - 22:33
a
6314
11
Md Hasan Uz Zaman's picture
Md Hasan Uz Zaman
05/26/2019 - 22:34
b
6432
4
Md Hasan Uz Zaman's picture
Md Hasan Uz Zaman
05/26/2019 - 23:07
c
6434
5