2 The directors of Silberman Ltd are considering a proposal for a new machine that is estimated to cost 2,500,000. This would enable the company to manufacture a superior, additional new product, product Z. The accountant has prepared the following profit forecast on the assumption that the funds will be borrowed and the loan repaid at the end of the project: Profit forecast Sales Less: Cost of sales Other production expenses Administration charge Interest on loan Profit/(loss) Year 1 000 3,125 1,875 550 750 100 (150) Year 2 000 3.750 1,950 575 820 100 305 Year 3 000 5.000 3,450 700 930 100 (180) Year 4 000 6.250 4,200 940 1,050 100 (40) The figures in the profit forecast are based on the following: Cash received from sales and paid for costs will coincide with the financial year. The administration charge is an apportionment of central administration fixed overheads. It is assumed that the product has a four-year life. The machinery could be sold for 400,000 at the end of year 4. The other production expenses include the depreciation of the machine, using straight line depreciation. The following additional information not included in the profit forecast above is available: The production manager has said that if the new machine were installed there would be sufficient capacity to enable an existing machine to be sold immediately for approximately 350,000 and would create annual operating savings of 250,000. However, the accountant has told him that the existing machine currently stands in the books at 675,000 and the company could not afford to write off the asset against this year's profits. Initial market research for the new product has been performed by marketing consultants whose fee of 110,000 has just been received. The accountant has not included the following costs in the four-year profit calculation: The directors have spent a considerable amount of time on this project so far and they estimate the costs of their time equates to 50,000. Question continues on next page UL20/0368 Page 4 of 13 2 The directors of Silberman Ltd are considering a proposal for a new machine that is estimated to cost 2,500,000. This would enable the company to manufacture a superior, additional new product, product Z. The accountant has prepared the following profit forecast on the assumption that the funds will be borrowed and the loan repaid at the end of the project: Profit forecast Sales Less: Cost of sales Other production expenses Administration charge Interest on loan Profit/(loss) Year 1 000 3,125 1,875 550 750 100 (150) Year 2 000 3.750 1,950 575 820 100 305 Year 3 000 5.000 3,450 700 930 100 (180) Year 4 000 6.250 4,200 940 1,050 100 (40) The figures in the profit forecast are based on the following: Cash received from sales and paid for costs will coincide with the financial year. The administration charge is an apportionment of central administration fixed overheads. It is assumed that the product has a four-year life. The machinery could be sold for 400,000 at the end of year 4. The other production expenses include the depreciation of the machine, using straight line depreciation. The following additional information not included in the profit forecast above is available: The production manager has said that if the new machine were installed there would be sufficient capacity to enable an existing machine to be sold immediately for approximately 350,000 and would create annual operating savings of 250,000. However, the accountant has told him that the existing machine currently stands in the books at 675,000 and the company could not afford to write off the asset against this year's profits. Initial market research for the new product has been performed by marketing consultants whose fee of 110,000 has just been received. The accountant has not included the following costs in the four-year profit calculation: The directors have spent a considerable amount of time on this project so far and they estimate the costs of their time equates to 50,000. Question continues on next page UL20/0368 Page 4 of 13