ACFI2070 Week 5 workshop solutions_fundamental(1)(2).docx - Course coordinator Jialong Li Email [email protected] ACFI2070 S2 2018 Workshop 5

# ACFI2070 Week 5 workshop solutions_fundamental(1)(2).docx -...

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Course coordinator: Jialong Li Email: [email protected] ACFI2070 S2 2018 Workshop 5 solutions Fundamental questions Question 1: NPV (Problem 3, Chapter 6, Peirson 12ed) A software provider buys blank Bluray DVDs at \$550 per hundred and currently uses 2 million DVDs per year. The manager believes that it may be cheaper to make the DVDs rather than buy them. Direct production costs (labour, materials, fuel) are estimated at \$2.50 per DVD. The equipment needed would cost \$3 million. The equipment should last for 15 years, provided it is overhauled every 5 years at a cost of \$250 000 each time. The operation will require additional current assets of \$400 000. The company's required rate of return is 12 per cent. Evaluate the proposal. Answer : Consider the differential cash flows for manufacturing versus buying. Assume zero residual value at the end of 15 years. Direct production costs = 2 000 000 \$2.50 = \$5 000 000 per year. Purchase costs avoided = 2 000 000 (\$550/100) = \$11 000 000 per year.

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