ARR Coley Ltd presently earns a return on its capital of 18%. It proposes to manufacture...
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ARR Coley Ltd presently earns a return on its capital of 18%. It proposes to manufacture and market a new product, Longen. The manufacture of Longen will require the purchase of a new machine at a cost of $100,000 and additional working capital of $40,000. Sales of Longen are expected to be $66,000 per annum. The cost of manufacture will be $25,000 per annum. Selling and distribution costs will amount to $3,000 per annum. There will be no additional administration expenses. Coley Ltd depreciates its machinery at the rate of 10% on cost each year. Required: (a) Calculate the ARR expected from Longen. (b) State, with reasons, whether or not Coley Ltd should proceed to make and market Longen. (c) Your views on the advantages and disadvantages of using the ARR to assess capital expenditure. ARR Coley Ltd presently earns a return on its capital of 18%. It proposes to manufacture and market a new product, Longen. The manufacture of Longen will require the purchase of a new machine at a cost of $100,000 and additional working capital of $40,000. Sales of Longen are expected to be $66,000 per annum. The cost of manufacture will be $25,000 per annum. Selling and distribution costs will amount to $3,000 per annum. There will be no additional administration expenses. Coley Ltd depreciates its machinery at the rate of 10% on cost each year. Required: (a) Calculate the ARR expected from Longen. (b) State, with reasons, whether or not Coley Ltd should proceed to make and market Longen. (c) Your views on the advantages and disadvantages of using the ARR to assess capital expenditure.
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