Arcmat plc owns a factory which at present is empty. Mrs Hambicious, a business strategist, has been
Question:
Arcmat plc owns a factory which at present is empty. Mrs Hambicious, a business strategist, has been working on a proposal for using the factory for doll manufacture. This will require complete modernisation. Mrs Hambicious is a little confused about project appraisal and has asked your advice about which of the following are relevant and incremental cash flows.
a The future cost of modernising the factory.
b The £100,000 spent two months ago on a market survey investigating the demand for these plastic dolls.
c Machines to produce the dolls – cost £10m payable on delivery.
d Depreciation on the machines.
e 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.
f Three senior managers will be drafted in from other divisions for a period of a year.
g A proportion of the US head office costs.
h The tax saving due to the plant investment being offset against taxable income.
i The £1m of additional raw material stock required at the start of production.
j The interest that will be charged on the £20m bank loan needed to initiate this project.
k The cost of the utility services installed last year.
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