Delsteph Co introduced a new product, LD to its range last year. The machine used to mould each item is a bottleneck in the production process meaning that a maximum of 7000 units per annum can be manufactured. The LD product has been a huge success in the market place and as a result, all items manufactured are sold. The marketing department has prepared the following demand forecast for future years as a result of feedback from customers. Year 1 Demand (units) 8500 2 Maximum additional output Current selling price Variable operating costs Fixed operating costs 10500 $30000 3 The directors are now considering investing in a second machine that will allow the company to satisfy the excess demand. The following information relating to this investment proposal has now been prepared: Initial investment 7000 units 12000 Page 7 of 10 $90 per unit $40 per unit $20000 per year 4 6000 If production remained at 6000 units, the current selling price would be expected to continue throughout the remainder of the life of the product. However, if production is increased, it is expected that the selling price will fall to $75 per unit for all units sold. Again, this will last for the remainder of the life of the product. No terminal value or machine scrap value is expected at the end of four years, when production of LD is planned to end. For investment appraisal purposes, Delsteph uses a nominal (money) discount rate of 11% per year and a target return on capital employed of 20% per year. Ignore taxation Required (a) Calculate the following values for the investment proposal. (i) Net Present Value; (ii) Internal Rate of Return; (iii) Return on Capital Employed (Accounting Rate of Return) based on initial investment; and (iv) Discounted Payback Period
Delsteph Co introduced a new product, LD to its range last year. The machine used to mould each item is a bottleneck in the production process meaning that a maximum of 7000 units per annum can be manufactured. The LD product has been a huge success in the market place and as a result, all items manufactured are sold. The marketing department has prepared the following demand forecast for future years as a result of feedback from customers. Year 1 Demand (units) 8500 2 Maximum additional output Current selling price Variable operating costs Fixed operating costs 10500 $30000 3 The directors are now considering investing in a second machine that will allow the company to satisfy the excess demand. The following information relating to this investment proposal has now been prepared: Initial investment 7000 units 12000 Page 7 of 10 $90 per unit $40 per unit $20000 per year 4 6000 If production remained at 6000 units, the current selling price would be expected to continue throughout the remainder of the life of the product. However, if production is increased, it is expected that the selling price will fall to $75 per unit for all units sold. Again, this will last for the remainder of the life of the product. No terminal value or machine scrap value is expected at the end of four years, when production of LD is planned to end. For investment appraisal purposes, Delsteph uses a nominal (money) discount rate of 11% per year and a target return on capital employed of 20% per year. Ignore taxation Required (a) Calculate the following values for the investment proposal. (i) Net Present Value; (ii) Internal Rate of Return; (iii) Return on Capital Employed (Accounting Rate of Return) based on initial investment; and (iv) Discounted Payback Period
Chapter18: The Management Of Accounts Receivable And Inventories
Section: Chapter Questions
Problem 19P
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Transcribed Image Text:Delsteph Co introduced a new product, LD to its range last year. The machine used to mould each item is
a bottleneck in the production process meaning that a maximum of 7000 units per annum can be
manufactured.
The LD product has been a huge success in the market place and as a result, all items manufactured are
sold. The marketing department has prepared the following demand forecast for future years as a result of
feedback from customers.
Year
1
Demand (units) 8500
2
Maximum additional output
Current selling price
Variable operating costs
Fixed operating costs
10500
$30000
3
The directors are now considering investing in a second machine that will allow the company to satisfy
the excess demand. The following information relating to this investment proposal has now been
prepared:
Initial investment
7000 units
12000
Page 7 of 10
$90 per unit
$40 per unit
$20000 per year
4
6000
If production remained at 6000 units, the current selling price would be expected to continue throughout
the remainder of the life of the product. However, if production is increased, it is expected that the selling
price will fall to $75 per unit for all units sold. Again, this will last for the remainder of the life of the
product.
No terminal value or machine scrap value is expected at the end of four years, when production of LD is
planned to end. For investment appraisal purposes, Delsteph uses a nominal (money) discount rate of 11%
per year and a target return on capital employed of 20% per year. Ignore taxation
Required
(a) Calculate the following values for the investment proposal.
(i) Net Present Value;
(ii) Internal Rate of Return;
(iii) Return on Capital Employed (Accounting Rate of Return) based on initial investment; and
(iv) Discounted Payback Period
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