Byng plc (Byng) is a toy manufacturer. The latest product, which has already been developed at a cost of 125,000 and is due to be paid for next week, is called the "Bongo". Based on a market research report costing 13,000, which Byng has already paid for the company has estimated that sales of 54,000 units per year are achievable at a selling price of 7.30 per unit. Manufacturing costs of 1.40 per unit will be incurred to produce the Bongo. Byng expects that it will be able to sell the Bongo for a period of four years before it becomes obsolete. In order to manufacture the Bongo, Byng will need to purchase new machinery at a cost of 180,000, payable at the start of production. The production process is very efficient and so Byng will be able to start selling the Bongo almost immediately after production starts. Byng will have to pay 65,000 to scrap the machinery at the end of the fourth year of production. Byng will need to hire additional staff to operate the new machinery. There is a shortage of skilled labour but unskilled workers are readily available. These unskilled workers will need to be trained at a cost of 18,000 in each year. This training will occur during normal operations and there will be no impact on production while the training is taking place. The unskilled labour rate is 23 per hour and this is not expected to change during the four years of production. Each Bongo will require 9 minutes of labour to produce and package ready for sale to customers. Additional working capital of 25,000 will be required at the start of production of the Bongo. Byng expects that the total amount of working capital required to produce and sell the Bongo will increase by 3,000 in each year of production and that all working capital will be recovered at the end of the fourth year. Byng's cost of capital is expected to be 17% for the duration of the project. Ignore taxation. Required (a) Calculate the NPV and IRR of manufacturing and selling the Bongo for the proposed four-year period and, based on your workings, advise Byng on whether the Bongo should be produced. (23 marks) (b) (23 marks) Explain why depreciation and interest costs should not be included in the cash flows of a net present value calculation. (2 marks) (Total: 25 marks) Note: Present value tables are available at the end of the exam paper, in Appendix 1. Appendix 1 - Present value factors Present value of 1 in n years at discount rater. Years Discount rate (1) (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 1 10% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 16 0.853 0.728 0.623 0.534 0.458 -0.394 0.339 0.292 0.252 0.218 17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.22 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 1 2 3 5 9