13.1 Glen Eagles is the proprietor of a small but long-established manufacturing business that has consistently made an annual profit of £20,000. The financial results of the business have shown little change in recent years, and the financial position has been very stable, supported by the fact that annual drawings have generally been lower than the profit. The expectation is that there will be little change over the next few years and that the level of profit will be maintained.

Eagles has recently been invited by Troon Ltd to increase his production to meet an export demand in a market where the prospects of development and increased sales are very substantial. Additional plant with a life of ten years, and a zero residual value at the end of that period, will be needed for such an expansion. Machines that will produce 46,000 items per annum are available at a cost of £36,000 each.

The selling price per item is £1, and the variable costs of manufacture for the export market will be 55p per item. Additional general expenses will amount to £10,000 for the first £46,000 increase in sales, but will fall to £4,000 for each £46,000 block of additional sales above the first £46,000.

Eagles has no private resources. The existing liquid resources of the business would cover any additional working capital required, and also provide £10,000 towards the capital cost of the new project. A bank is willing to lend up to £100,000 to Eagles at an interest rate of 15 per cent per annum.

An alternative proposal is made to Eagles. Troon Ltd offers him £120,000 in cash for his entire business and is prepared to retain his services as a manager on a ten-year contract at a salary of £14,000 per annum plus an additional £3,000 per annum for each £46,000 increase in turnover.

Eagles can expect to invest the proceeds of the sale of his business to earn interest of 10 per cent per annum.

(a) Statements reporting on the profit likely to be received from overseas sales at the rate of £46,000, £92,000 and £138,000 per annum, respectively.

(b) Prepare a report to Eagles that shows the results of the alternative course of action open to him.