b$)$ A manufacturing company has just developed a new product to be called Zongo and is

now considering whether to put it into production.

Costs incurred in the development of Zongo were $800,000.$

Production of Zongo would require the purchase of new machinery at a cost of

$10,800,000($payable immediately$).$ The machinery would have a useful life of $4$ years, at the

end of which its salvage value would be zero.

Production costs per unit of Zongo $($at year $1$ prices$)$ would be as follows:

Variable materials $18$

Variable labor $27$

Variable overheads $27$

In addition, fixed production costs$)($at year $1$ prices$).$ including straight line depreciation on

plant and machinery would be $3\mathrm{.}600\mathrm{.}000.$

The selling price of Zongo will be $180$ per unit $($at year $1$ prices$)$ and sales are expected to

be $60,000$ units in each of the next $4$ years.

The retail price index is expected to rise at a rate of $5\%$ per year for the next $4$ years and the

selling price of Zongo is expected to rise at the same rate. Annual inflation rates for

production costs are expected to be as follows:

The company's weighted average cost of capital $($in nominal terms$)$ is expected to be $15\%.$

REQUIRED $($making any necessary assumptions and showing all workings$)$:

On the basis of the above information, perform relevant calculations to determine the net

present value of the Zongo project and offer your advice on whether or not the

manufacturing company should go ahead with the production of Zongo.

Note: You may ignore taxation and also assume that all costs and revenues rise at the end

of each year.b$)$ A manufacturing company has just developed a new product to be called Zongo and is now considering whether to put it into production.

Costs incurred in the development of Zongo were $800,000.$

Production of Zongo would require the purchase of new machinery at a cost of $10,800,000($payable immediately$).$ The machinery would have a useful life of $4$ years,at the end of which its salvage value would be zero.

Production costs per unit of Zongo $($at year $1$ prices$)$ would be as follows:

Variable materials $18$

Variable labour $27$

Variable overheads $27$

In addition, fixed production costs$)($at year $1$ prices$).$ including straight line depreciation on plant and machinery would be $3\mathrm{.}600\mathrm{.}000.$

The selling price of Zongo will be $180$ per unit $($at year $1$ prices$)$ and sales are expected to be $60,000$ units in each of the next $4$ years.

The retail price index is expected to rise at a rate of $5\%$ per year for the next $4$ years and the selling price of Zongo is expected to rise at the same rate. Annual inflation rates for production costs are expected to be as follows:

Variable materials $4\%$

Variable labour $10\%$

Variable overheads $4\%$

Fixed costs $5\%$

The company's weighted average cost of capital $($in nominal terms$)$ is expected to be $15\%.$

REQUIRED $($making any necessary assumptions and showing all workings$)$:

On the basis of the above information, perform relevant calculations to determine the net present value of the Zongo project and offer your advice on whether or not the manufacturing company should go ahead with the production of Zongo.

Note: You may ignore taxation and also assume that all costs and revenues rise at the end of each year.