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Assume you are the Logistics and Procurement Manager of XYZ Ltd which is considering investing in a new process at its refinery that is expected
Assume you are the Logistics and Procurement Manager of XYZ Ltd which is considering investing in a new process at its refinery that is expected to have a useful economic life of ten years. Quotations from the supplier indicate that its cost will be Tshs 500 billion with Tshs 30 billion scrap value. The process is expected to produce 1,500,000 barrels per annum with an estimated selling price of Tshs 240,000 per unit. Direct costs would be Tshs 128,000 per unit and annual fixed costs, including depreciation calculated on a straight-line basis, would be Tshs 80 billion per annum. In years 1 and 2, special sales promotion expenditure, not included in the above costs, would be incurred, amounting to Tshs 50 million and Tshs 20 million respectively. As a consequence of this particular project, investment by the company in debtors and stocks would increase, during year 1, by Tshs 25 billion and Tshs 40 billion respectively, and creditors would also increase by Tshs. 20 billion. At the end of the machine's life, debtors, stocks and creditors would revert to their previous levels. Required: Evaluate the project using the discounted payback period and the NPV methods assuming the company's cost of capital is 10 percent
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