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Last year Brackley Electronics had a good financial year. Their Profit and Loss Account for the financial year is shown in Table 1.1 and their

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Last year Brackley Electronics had a good financial year. Their Profit and Loss Account for the financial year is shown in Table 1.1 and their Balance Sheet at the end of the financial year is shown in Table 1.2. Table 1.1 Profit and Loss Account for Brackley Electronics for the 2020/21 financial year Profit and Loss Sales Revenue 10,500,000.00 Cost of Sales 4,500,000.00 Gross Profit 6,000,000.00 Overheads 4,500,000.00 Net Profit 1,500,000.00 Table 1.2 Balance Sheet for Brackley Electronics as at the end of the 2021/22 financial year 15,000,000.00 Tangible fixed assets Current assets Cash in Bank Debtors Stock Current liabilities f f 75,000.00 120,000.00 114,000.00 95,000.00 214,000.00 Net Current Assets E f 4,500,000.00 Long Term Liabilities Net Assets 10,714,000.00 Brackley Electronics has researched the market development and production costs of a possible new product it could produce. It forecasts it will cost 650,000 to develop the product, a cost it will incur in 2022. The forecast product sales volume and selling price is shown in Table 1.3. Table 1.3 Sales predictions for the new product 2022 Sales Volume Selling Price, 2023 2,500 250 2024 3,500 275 2025 4,500 275 2026 4,500 300 2027 3,000 325 The materials cost for each product is predicted to be 100 in 2023 and is anticipated to rise by 4% per year every year from 2023 onwards. The labour cost for each product is predicted to be 28.67 in 2023 and is anticipated to rise by 2% per year every year from 2023 onwards. The required labour will come from the general production facility which is predicted to have sufficient spare capacity to enable production of this product without needing to hire any more production workers. Overheads are anticipated to be 65,000 per year starting in 2022. (a) [5 Marks] What hurdle rate should Brackley Electronics use in the calculation of whether they should invest in this new product or not? (b) [10 Marks) From a financial point of view should they develop the new product and why or why not? (c) [10 Marks] What other considerations might the company want to take into account in reaching their decision? Include reasons for and against

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