A company is considering the introduction of a new Chocolate Cake into their range of cakes. The new Chocolate Cake will require the purchase of a new piece of equipment costing 30,000 which will have no other use and no residual value on completion of the project. Using an Excel-based standard recipe calculate the variable cost per Chocolate Cake and the selling price based on mark-up on cost.

Per Chocolate Cake () Selling price ??? Variable costs ???

Other developments currently being finalised will mean that the new product will have a life of only three years and the level of expected demand for the new product is uncertain. The marketing department has produced the following levels of demand and the probability of each for all three years of the products life.A rival business has offered to buy the right to produce and sell the new Chocolate Cake for 300,000. The cost of finance is 10% and interest charges on the money borrowed to finance the project are expected to be 3,000 per year.

Required:

a) Compute the expected net present value of the product.

b) Advise the directors on the appropriate course of action with reasoning.

\begin{tabular}{|c|c|c|c|c|c|} \hline \multicolumn{2}{|l|}{ Year 1} & \multicolumn{2}{|l|}{ Year 2} & \multicolumn{2}{|l|}{ Year 3} \\ \hline Sales Units & Probability & Sales Units & Probability & Sales Units & Probability \\ \hline 100000 & 0.2 & 140000 & 0.3 & 180000 & 0.5 \\ \hline 120000 & 0.4 & 150000 & 0.3 & 160000 & 0.3 \\ \hline 125000 & 0.3 & 160000 & 0.2 & 120000 & 0.1 \\ \hline 130000 & 0.1 & 200000 & 0.2 & 100000 & 0.1 \\ \hline \end{tabular}