Hix plc is a medium-sized manufacturer of sports products that has been listed on the stock exchange for three years. Although the company has an overdraft, it has no long-term debt and its current interest cover is high compared to similar companies. Its return on capital employed, however, is close to the average for its business sector. One of its machines is leased under an operating lease, but the company has no other leasing or hire purchase commitments. The company owns two factories and the land on which they are built, as well as a small fleet of delivery vehicles. The company does not own any retail outlets through which to distribute its manufactured output.

Hix plc is considering an investment in a new machine, with a maximum output of 200,000 units per annum, in order to manufacture a new product. Market research undertaken for the company indicated a link between selling price and demand, and the research agency involved has suggested two sales strategies that could be implemented, as follows:

Strategy 1 Strategy 2 Selling price (in current price terms) (8.00 per unit (7.00 per unit Sales volume in first year 100,000 units 110,000 units Annual increase in sales volume after first 5% 15% year