Question
Maurice Limited is proposing to invest 750,000 in equipment to manufacture a new product. Research and development costs of 50,000 have been incurred. The equipment
Maurice Limited is proposing to invest 750,000 in equipment to manufacture a new product. Research and development costs of 50,000 have been incurred. The equipment is expected to have a useful life of four years and a scrap value of 125,000. It is anticipated that the equipment will allow 2,000 units of the product to be produced in each of the four years, with an expected selling price of 270 per unit and unit variable costs of 170. Additional company administrative costs associated with the product are expected to be 40,000 per annum in each of the four years. The companys cost of capital is 10%. The impact of taxation and inflation can be ignored. Requirement: Calculate the NPV of the proposed investment and advise whether the company should proceed with its proposal.
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