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1. 0 The Directors of Market Muir PLC are planning to invest in new production technology with fixed costs of 200,000 per year and an
1. 0 The Directors of Market Muir PLC are planning to invest in new production technology with fixed costs of 200,000 per year and an operating cash flow at 11,000 units of 235,000. Required Ignoring taxation: (a) Calculate the degree of operating leverage involved with the investment. (5) (b) If the number of units sold falls from 11,000 to 10,000 calculate the reduction in operating cash flow and the new degree of operating leverage. (10) (D) Seattle Sutures Inc. is investigating the possibility of supplying the UK with 85,000 Jobos each year for a project designed to encourage transatlantic manufacturing collaboration The initial investment in the equipment needed to produce the Jobos will be $6,000,000. The project is expected to last five years. Fixed costs are predicted to be $650,000 with variable costs estimated at $240 per Jobo. The equipment involved will be depreciated to zero on the straight-line basis over its five-year life, with a likely salvage value of $1,500,000. The agreed selling price is $300 per Jobo and an initial net working capital investment of $400,000 would be needed. The required rate of return for Seattle Sutures Inc. is 16% and the relevant rate of tax is 18%. Required (a) Calculate the operating cash-flows (OCFS) and net present value (NPV) for the proposed project (10) If the estimates of the cost, salvage value, price and net working capital are accurate to only 15% calculate the best case OCFs and NPVs. (25) (50) (b)
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