Information gathered on the particulars of each investment decision are given in the Appendices, along with the following general information regarding Bryson plc:- 1. Bryson plc prepares accounts with a financial year ending 31st December and company earnings are subject to 19% corporation tax, payable on a current year basis. 2. Land and buildings qualify for 5% reducing balance industrial buildings allowances whilst plant, equipment and machinery are subject to 'short-life' asset election and attract 20% reducing balance tax allowances. Capital allowances can be claimed in the year of acquisition and every subsequent year of ownership except for the last year where a balancing allowance can be claimed or there will be a balancing charge to the company, unless otherwise specified in the particulars of each case. 3. The general inflation rate is 3% p.a. and all operating cash flows (revenues and operating costs) are quoted at current 2021 prices and subject to annual inflation, unless otherwise specified in the particulars of each case. 4. Management consider the company's overall existing average cost of capital is an appropriate rate to appraise all capital investments. 5. Extracts from Bryson ple's current statement of Financial Position and additional information pertaining to the company's securities is given below:- 50p ordinary share capital 8% 1 preference share capital 260,000,000 12.5% 100 loan stock 2025 120,000,000 60,000,000 80,000,000 Net Assets Bryson pays a constant dividend of 33p per share and the loan stock is redeemable at current market value. The current market prices of the company's securities are as follows:- 50p ordinary shares 220p 8% 1 preference shares 12.5% loan stock 2025 100 96p Omega - New Product Line? The cash expenditure to date on this development has totalled 200,000, payable at the end of this year. The work is now complete, resulting in a marketable product Omega. The company will need to build and equip a new factory specifically and a suitable site has been found with a purchase price of 270,000. Acquisition of the land and construction of the factory will commence at the beginning of January 2022. Construction will take one year at a total cost of 2.5 million. Half of this sum will be payable at the start of construction, the balance being payable on completion. The cost of the necessary equipment and installation will cost a total of 1,250,000 and can be done during the last two months of construction. 250,000 of this will be paid on delivery and the balance in two equal annual instalments on the anniversary of delivery. The above acquisition prices are fixed and not subject to inflation A significant advertising campaign will need to be undertaken for the new product Omega, commencing at the beginning of construction of the factory. During its first year the campaign will cost 150,000 and will continue for the next two years at an agreed fixed cost of 250,000 and 100,000 respectively. Payments will be made at the end of each of the 3 years. As a result of the advertising campaign, the Sales Director is forecasting an annual demand of 400,000 units of Omega in 2023 and expects this demand to continue for six years after. Initial production will begin immediately after completion of the factory at an annual output rate to match the forecasted demand from 2023 onwards. Production overheads will consist of variable costs of 4.50 per unit and annual fixed costs of 300,000 Both production costs are quoted in current terms and are subject to general inflation p.a. After 3 years of production the equipment will need replacing. The old machine will be sold for 450,000 and new equipment acquired at the end of 2025 at the same cost and on the same terms of payment as the original equipment. This replacement can be achieved without disruption to production At the end of six years of production, Omega will be abruptly discontinued, and the production facility will then be surplus to requirement. It is expected that the equipment can be sold at the time for 450,000 and the factory and site will command a price of 3 million. Capital allowances for both of these categories of non-current assets will begin in the year of production. Despite extensive market research during the last 6 months at a cost of 50,000 payable on 14 January 2022, management remains uncertain as to the price it will be able to charge for Omega. The Sales Director is currently suggesting a fixed selling price of 9 per unit (ignore inflation), Financial Director Requirements Assuming the Sales Director's forecast selling price is adopted, evaluate whether the company should go ahead with the proposed production of Omega, by calculating the net present value of the investment. What would be the minimum selling price that must be achieved in order to ensure Omega is viable? a Beta - Relocation to new site? Bryson plc is considering moving one of its factories to a new site. The new site would cause a significant disruption to existing production and sales of Beta, however the current production capacity of 6 million units would no longer be constrained by the size of the existing factory and hence, a higher output can be achieved to match a growing demand for Beta. Moving to the new premises would take place at the beginning of 2022. The existing premises would be leased out indefinitely commencing on 19 January 2022 for an annual rent of 200,000 payable in advance Lease rentals would be subject to general inflation and corporation tax. The cost of the new premises would be 10 million payable on 1" January 2022. The new premises would qualify for 5% p.a. industrial buildings allowances on a reducing balance basis. For the purposes of investment appraisal, assume the allowances will be claimed indefinitely. Improved machinery for the new factory would be purchased on 1" January 2022 at a cost of 1 million. The machinery would be expected to be sold at the end of 2025 for 300,000. The old machinery, which has a zero written down value, would need to be scrapped but due to its specialist nature would not generate any proceeds The maximum production capacity of the new factory would normally be 10 million units per year but due to initial setting-up time and disruption from moving, the capacity of the new factory for 2022 would only be 5 million units. Potential sales demand for the company's output is estimated to be 8 million units in 2022,9 million units in 2023, 10 million units in 2024,8 million units in 2025 and 6 million units in 2026 onwards. Given that projected sales and output are equal for both factories from 2026 onwards, no incremental manufacturing costs or revenues will arise from the move after 2025. Labour is employed under flexible contracts and therefore the labour costs will vary directly with output, being 1 per unit of output. This is the case for the existing and new factory. If the company decides to move site, it is anticipated that some employees will refuse to move and hence it is expected that the company will have to make redundancy payments of 200,000 on 1st January 2022. The company will have to replace these employees and incur retraining costs of 100,000 payable on 31" December 2022 Material quantities per unit of Beta and costs per kg are as follows: Quantity Cost per kg Material XR2 2 kgs 1.50 Material TS4 1 kg 1.25 Material XR2 is only available from an overseas supplier during 2022 and 2023 leading to additional transport costs of 1.75 per kg of material purchases. From 2024 however, it is expected that a UK Supplier will be able to provide the material at the basic 1.50 per kg. The selling price per unit of Beta is set in order to achieve a contribution of 40%. Contribution is defined as selling price less variable costs (material and labour). It excludes transport costs, training and redundancy costs. All the above costs and revenues are quoted in current prices and subject to general inflation per annum, with the exception of the expected disposal proceeds and capital allowances. Financial Director's Requirement Identify the annual net incremental cash flows (based on the incremental output) that would arise fro the company's decision to move the location of its factory, and calculate the NPV of the investment. Gamma - Advertising campaign or discontinue? The lease on a factory which Bryson plc currently rents is due to expire at the end of 2024. The factory is entirely devoted in the production of Gamma. The market for Gamma has been declining and a decision was taken two years ago by management to not seek renewal of the lease, but to discontinue the production of Gamma when the lease expires. However at a recent meeting, management questioned whether it might be more beneficial to cease production at the end of this year, three years earlier than had originally been decided Currently sales of Gamma (inflation adjusted) are projected to be 10 million in 2022, E75 million in 2023 and 5 million in 2024, but the marketing director believes that these figures could be increased if an advertising campaign were to be undertaken. Such a campaign will cost 3 million and would involve cash outlays of 1.5m in 2022, Elm in 2023 and 500,000 in 2024. The marketing director acknowledges that the results of the advertising campaign are uncertain, but believes that there would be at least a 10% increase in the projected sales figures and the increase could be as high as 25%. It was agreed that it is reasonable to assume that there is a 40% chance that there will be a 10% increase, and a 60% chance that the increase in projected sales will be 25%. The variable costs of the production of Gamma are estimated to be 30% of the selling price. The rent of the factory is a 5 million a year, payable in advance. The owner of the factory will not agree to an early termination of the lease agreement, but the company has the right to sublet the factory Management are confident of finding a tenant who will pay 4 million at the beginning of each of the three relevant years. Ignore inflation The plant used in the factory was all bought in January 2018 for 2 million. Were the factory to close at the end of 2021, the plant would be sold for 1 million, but if it were retained until 2024 it would be sold at the end of 2024 for 200,000 Apart from rent and depreciation, administrative overheads are estimated to be a 1 million each year, including a 300,000 allocation of head office costs. Ignore inflation. When the factory closes, certain workers would be entitled to redundancy payments. These are estimated to be 500,000 if closure were to take place in 2021, but expected to be 250,000 if closure were in 2024. In either case the payment would be made on the day of closure. Production of Gamma gives rise to a working capital requirement of an amount equal to 5% of the sales value. This needs to be in place by the beginning of each year concerned and at the end of the production period, all working capital will have to be released. Financial Director's Requirements Determine on the basis of NPV, whether the advertising campaign as suggested by the marketing Director is worthwhile. Assume a discount rate of 15% for appraising the advertising investment. Considering your conclusion over the advertising campaign, determine whether the company should close the factory in 2021 or in 2024, based on NPV analysis and the company's preferred choice in discount rate for capital investments. Delta - Modification or ceasing production? Bryson plc leases another factory where, among other products, it produces Delta. The factory lease expires on 31" December 2025, and hence management is reviewing the future of all its production there in anticipation of that event. Currently the immediate future of Delta is in doubt. Some directors believe that recent developments have rendered Delta an uneconomic prospect for the company during the next four years ending December 2025. It seems fairly certain that irrespective of the short-term future of Delta, its manufacture will not be continued beyond 2025. Estimated sales demand for Delta over the next four years at a unit selling price of 35 is 500,000 units for 2022 and 2023, 400,000 units for 2024 and 300,000 units for 2025. The Operations Director believes however, were a modification to be made to the production of Delta, demand would rise to 750,000 units in in 2022 and 700,000 units in 2023. This modification would have no effect on the demand in 2024 and 2025. The modification could be effected by the end of 2021 at a cost of 8 million, payable on 314 December 2021. This amount is fully allowable for corporation tax for the year in which the expenditure would be incurred. The factory is leased for 6 million per annum, payable in advance. Discontinuing Delta would release 25% of the factory space but this could not be used for any other activity. The direct variable manufacturing costs of each unit of Delta are 4 for labour and 7 for raw material and bought-in parts. Inventories of nearly all raw materials are negligible, except for one bought-in part for which there is surplus inventory of 1,000,000 units. This bought-in part is included in the raw material and bought-in parts total of E7 at its cost price of 2 per unit. Each unit of Delta requires the use of one of these bought-in part and this part can only be used in the production of Delta. If production of Delta was not to continue, this inventory could be sold for 60p per unit at the end of 2021 for immediate cash settlement. If production is discontinued, the labour released could be transferred to another department of the factory for work on another of the company's products Epsilon Demand for Epsilon exceeds current capacity due to a shortage of labour, a shortage which would otherwise persist throughout the four years. For every 1 work of labour transferred, it is estimated that a contribution (sales less labour and materials) of 3 could be generated from the additional sales of Epsilon. If the modification is undertaken, this would not affect the output of other products. Plant bought for 10 million at the beginning at 2020 is used to manufacture Delta. The plant could be disposed of at the end of 2021 for an estimated 6 million. However by the end of 2025 it would be expected to have no market value. it is estimated that apportioned overheads incurred in the production of Delta total 5 million per annum of this amount 2 million could be avoided by ceasing production: Ignore Inflation for the purposes of this appraisal. Financial Director's Requirement Assess whether it would be economically viable to pay for the modification to the design of Delta as suggested by the Operations Director. Assume an appropriate discount rate of 16% for the modificatic investment. Using the results from above, prepare a statement of the annual relevan ash flows associated with decision on whether to continue production until the end of 2025 and the NPV using the company's preferred choice in discount rate for capital investments