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3 TWO PROJECTS A company wishes to use a five - year time scale over which to appraise the following projects, with no allowance for
TWO PROJECTS
A company wishes to use a fiveyear time scale over which to appraise the following projects, with no
allowance for scrap values. Its required rate of return is
Project
Purchase of patent rights to a new process at an initial cost of $ payable immediately.
The new process will enable the company to reduce its labour force, at present incurring a total wages bill
of $ by a quarte; and will allow an increased production capacity of units per year of
another existing product which at present is sold at $ per unit with direct costs of $ There is an
chance that the extra potential production could all be sold, with a chance of demand only taking up
an extra units per year. Production would be adjusted to match demand. This product is made with
harcly any labour.
Project
Installation of a minicomputer to deal with the accounting functions at an annual rental charge of
S paid in advance At present the company uses an IT service bureau at a cost of approximately
$ per year payable in arrears. This will be run in parallel" for the first year. The installation will
result in staff being sent on a training course during the first year which is expected to and
the employment of a consultant for the first year, to whom $ will be payable in six months 'time and
another $ in twelve months' time.
Required:
Determine which if either of the projects are worth further consideration based on the information given.
assuming all cash flows arise at the end of the year to which they relate unless otherwise stated.
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