Arcmat plc owns a factory which at present is empty. Mrs X, a business strategist, has been working on a proposal for using the factory for doll manufacture. This will require complete modernisation. Mrs X is a little confused about project appraisal and has asked your advice about which of the following are relevant and incremental cash flows. 1) The future cost of modernising the factory. 2) The $100,000 spent two months ago on a market survey investigating the demand for these plastic dolls. 3) Machines to produce the dolls – cost $10m payable on delivery. 4) Depreciation on the machines. 5) Arcmat’s other product lines are expected to be more popular due to the complementary nature of the new doll range with these existing products – the net cash flow effect is anticipated at $1m. 6) Three senior managers will be drafted in from other divisions for a period of a year. 7) A proportion of the US head office costs. 8) The tax saving due to the plant investment being offset against taxable income. 9) The $1m of additional raw material stock required at the start of production. 10) The interest that will be charged on the $20m bank loan needed to initiate this project. 11) The cost of the utility services installed last year.
Arcmat plc owns a factory which at present is empty. Mrs X, a business strategist, has been working on a proposal for using the factory for doll manufacture. This will require complete modernisation. Mrs X is a little confused about project appraisal and has asked your advice about which of the following are relevant and incremental cash flows.
1) The future cost of modernising the factory.
2) The $100,000 spent two months ago on a market survey investigating the demand for these plastic dolls.
3) Machines to produce the dolls – cost $10m payable on delivery.
4) Depreciation on the machines.
5) Arcmat’s other product lines are expected to be more popular due to the complementary nature of the new doll range with these existing products – the net cash flow effect is anticipated at $1m.
6) Three senior managers will be drafted in from other divisions for a period of a year. 7) A proportion of the US head office costs.
8) The tax saving due to the plant investment being offset against taxable income.
9) The $1m of additional raw material stock required at the start of production.
10) The interest that will be charged on the $20m bank loan needed to initiate this project. 11) The cost of the utility services installed last year.
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