The company has been evaluating an investment proposal to manufacture Product

The company has been evaluating an investment

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Uftin Co is a large company which is listed on a major stock market. The company has been evaluating an investment proposal to manufacture Product K3J. The initial investment of $1,800,000 w ill be payable at the start of the first year of operation. The following draft evaluation has been prepared by a junior employee. Year 1 2 3 4 Sales (units/year) 95,000 100,000 150,000 150,000 Selling price ($/unit) 25 25 26 27 Variable costs ($/unit) 11 12 12 13 (Note: The above selling prices and variable costs per unit have not been inflated.) Year 1 2 3 4 $000 $000 $000 $000 Sales revenue 2,475 2,605 4,064 4,220 Variable costs (1,097) (1,260) (1,890) (2,048) Fixed costs (155) (155) (155) (155) Interest payments (150) (150) (150) (150) Cash flow before tax 1,073 1,040 1,869 1,867 Tax allowable depreciation (450) (450) (450) (450) Taxable profit 623 590 1,419 1,417 Taxation (137) (130) (312) Net cash flow 623 453 1,289 1,105 Discount at 12% 0.893 0.797 0.712 0.636 Present values 556 361 918 703 Present value of cash inflows 2,538 Cost of machine (1,800) NPV 738
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___________________________________________________________________________________________________________________ Page 11 of 13 IPK COLLEGE 1664, JALAN KULIM, 14202 BUKIT MERTAJAM, PENANG TEL : 012-5203212 / 0125113212 / 04-5512588 Subject: Financial Management (DFM1) Prepared by Susan Lim Email : [email protected] The junior employee also provided the following information: (1) Relevant fixed costs are forecast to be $150,000 per year. (2) Sales and production volumes are the same and no finished goods inventory is held. (3) The corporation tax rate is 22% per year and tax liabilities are payable one year in arrears. (4) Uftin Co can claim tax allowable depreciation of 25% per year on a reducing balance basis on the initial investment. (5) A balancing charge or allowance can be claimed at the end of the fourth year. (6) It is expected that selling price inflation will be 4.2% per year, variable cost infl ation will be 5% per year and fixed cost inflation will be 3% per year. (7) The investment has no scrap value. (8) The investment will be partly financed by a $1,500,000 loan at 10% per year. (9) Uftin Co has a weighted average cost of capital of 12% per year. REQUIRED a) Prepare a revised draft evaluation of the investment proposal and comment on its fi nancial acceptability. (12 marks) b) Explain the revisions you have made to the draft evaluation in part (a) above. (8 marks) (TOTAL 20 MARKS)
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___________________________________________________________________________________________________________________ Page 12 of 13 IPK COLLEGE 1664, JALAN KULIM, 14202 BUKIT MERTAJAM, PENANG TEL : 012-5203212 / 0125113212 / 04-5512588 Subject: Financial Management (DFM1) Prepared by Susan Lim Email : [email protected] Question Hebac Co is preparing to launch a new product in a new market which is outside its current business operations. The company has undertaken market research and test marketing at a cost of $500,000, as a result of which it expects the new product to be successful. Hebac Co plans to charge a lower selling price initially and then increase the selling price on the assumption that the new product will establish itself in the new market. Forecast sales volumes, selling prices and variable costs are as follows: Year 1 2 3 4 Sales volume (units/year) 200,000 800,000 900,000 400,000 Selling price ($/unit) 15 18 22 22 Variable costs ($/unit) 9 9 9 9 Selling price and variable cost are given here in current price terms before taking account of forecast selling price inflation of 4% per year and variable cost inflation of 5% per year.
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  • Spring '17
  • JANE KDAL

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