Gregg the marketing manager of a manufacturer of golf equipment has recently submitted a proposal
Question:
Gregg – the marketing manager of a manufacturer of golf equipment – has recently submitted a proposal for the production of a range of clubs for beginners. He has just received the following response from Mike, the managing director:
I have examined your proposal for the new ‘Clubs for Beginners’ range which you say promises a three-year payback and a 30 per cent DCF return. Some hope! You seem to have forgotten the following relevant points.
1 We have a policy that all investment is subject to a depreciation charge of 25 per cent on the reducing balance.
2 The accounting department will need to recover factory fixed overheads on the new machine.
3 We need to charge against the project the £8,000 marketing research conducted to assess the size of the market for the new range.
4 I’d have to pay 15 per cent to finance the project.
Projects like this I can do without!
How would you reply to this e-mail if you were Gregg?
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