Cameron Ltd has just completed, over a period of 1 year, the development of a new product, THE CUBE. Cameron now wished to decide whether to proceed with the production of the product. The following information is available:

1) The development work was completed in two years time by research department with 2 employees who earned $14,500 each p.a. Materials and components bought especially for this development work cost $4,400.

2) Selling price of cube is $90 each. It is expected that production and sales will be 5,000 units p.a. for eight years.

3) Production of cube required 3 types of materials:

MATERIALS	UNITS IN STOCK (KG)	NBV ($/KG)	NRV ($/KG)	REPLACEMENT COST ($/KG)
A	0	0	0	4
B	3,000	2	1	2.5
C	5,000	5	2	5.5

MATERIAL A: To be bought especially for the product.

MATERIAL B: Used regularly by Cameron and if it is required for this project they would have to be replaced to meet other production demand.

MATERIAL C: Stocks are as a result of previous over buying. There is no further use of C other than for the cube. Each cube requires 3 KG of A, 2KG of B and 1 KG of C.

4) 15 hours are required per unit @2.2 per hour. There is a scarcity of labour and consequently it has to be transfer from other project of the co. The co would have to accept a loss of $1 per hour (measured at sales less all variable costs including labour costs). The labour shortage is expected to occur only for 1 year.

5) Other variable costs are $16 per unit.

6) Two machines are required for the projects two processes. Process A will be requiring a machine purchased specially at a cost of $300,000 with residual value of $30,000 at the end of 8 years. Process B will be carried out on a machine already owned by co. This machine has WDV of $75,000. If the cube is not produced this machine can be sold for $50,000. At the end of 8 years its scrap value is zero.

7) Cost of capital of the company is 10%

REQUIRED:

Prepare calculations to show whether Cameron should produce cube based upon net present value approach