You are the financial analyst for Weir Group plc, the global engineering firm. The company is considering
Question:
You are the financial analyst for Weir Group plc, the global engineering firm. The company is considering the development of a new slurry pump in its existing products. The pump is expected to improve market share for the company if it is fully integrated into its existing product line-up. With the pace of new technological developments, you expect the slurry pump to be obsolete by the end of five years. The equipment required for the project has no salvage value. The required return for projects of this type is 20 per cent, and the company has a 24 per cent tax rate. Should you recommend the project? Assume 20 per cent reducing balance depreciation. (75 marks)
Pessimistic Expected Optimistic Market size 1,000 1,500 1,700 Market share (%) 15 20 25 Selling price (£) 10,000 15,000 20,000 Variable costs per unit (%) 72 70 68 Fixed costs per year (£) 400,000 450,000 550,000 Initial investment (£) 2,500,000 2,500,000 2,500,000
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