Hilma Ltd is considering the launch of a new product $x,$ for which an investment in

plant and machinery of $N$$$300,000$ is required.

The product is expected to last for five years, at the end of which the machinery would

be sold for a scrap value of $N$$$25,000.$

The product would have a selling price of $N$$$10$ per unit, with a variable cost of $N$$$4$

per unit.

Fixed costs of the product $($excluding depreciation$)$ would be $N$$$10,000$ per year.

The company has a cost of capital of $10\%$ per annum.

The following unit sales are forecast:

Year $18,000$

Year $27,000$

Year $37,000$

Year $45,000$

Year $53,000$

Discount factors for $10\%$ are Year $1\mathrm{.}909$

Year $2\mathrm{.}826$

Year $3\mathrm{.}751$

Year $4\mathrm{.}683$

Year $5\mathrm{.}621$

Required:

$($a$)$ Calculate the net present value of the new product.

$(18$ marks$)$

$($b$)$ The sales manager feels that the product $x$ will ruin the sales of product $Y$ which

is very similar. If this occurs there will be a fall in Y$\text{'}$s net cash inflows of $N$$$15,000$

per year over the five years.

It is suggested that $Y$ be abandoned and the machinery used to produce $Y$ be sold

for $N$$$60,000.$

Advise management, with supporting figures, as to the overall effect on the

company if $Y$ is abandoned and the machinery for $Y$ sold before production of $x$ is

commenced.