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Neqi plc has been producing reusable face masks for some time. The firm is considering to invest in new equipment, costing 5 million, to manufacture
Neqi plc has been producing reusable face masks for some time. The firm is considering to invest in new equipment, costing million, to manufacture a new type of reusable face mask. The new version comes in a pack of masks. Market research suggests scope to sell an additional units per year from the current level The new number of units will be the same from year to year. The research fee amounted to million and will be paid in year of the project. The pricing structure in British pounds of a typical mask is as follows: Price per unit XX Cost per unit output Variable cost per unit Fixed overhead cost per unit YY The fixed overhead represents existing fixed costs of the mask factory. Capital allowance, on a reducing balance basis, is at percent. This article discussed the nature of face masks and a comparison of Neqis highly regarded product and pricing compared to competitors offerings: https:wwwtheguardian.comworldoctfacemasktestwhichbestatlimitingspreadcovid The new production line is expected to operate for five years. It requires m of initial working capital which is expected to remain constant for the next five years. Working capital will not be recovered at the end of the project life. The equipment will have a residual value of million at the end of the life of the project. The new production line will be located in one of the companys buildings, being presently empty. This building was purchased at million three years ago, for which an offer price of million has recently been received. If the building is retained, the aftertax residual value is expected to be m after years. Neqis strategic planning division made the following forecasts for the average annual rates of inflation relevant to the project: Mask prices pa Direct costs pa Fixed overhead costs pa Neqis real cost of capital for projects of similar risk is percent. The general rate of inflation is percent. The marginal tax rate is percent. Required: a What is the projects actual monetary cost of capital? b Provide the reasons for the irrelevance of three cash flow items for project consideration. c Assess the financial viability of the proposed project using nominal actual cash flows. Monetary figures should be in million and intermediate computations should be in decimal places.
Neqi plc has been producing reusable face masks for some time. The firm is considering to invest in new equipment, costing million, to manufacture a new type of reusable face mask. The new version comes in a pack of masks. Market research suggests scope to sell an additional units per year from the current level The new number of units will be the same from year to year. The research fee amounted to million and will be paid in year of the project. The pricing structure in British pounds of a typical mask is as follows:
Price per unit XX
Cost per unit output
Variable cost per unit
Fixed overhead cost per unit
YY
The fixed overhead represents existing fixed costs of the mask factory. Capital allowance, on a reducing balance basis, is at percent.
This article discussed the nature of face masks and a comparison of Neqis highly regarded product and pricing compared to competitors offerings: https:wwwtheguardian.comworldoctfacemasktestwhichbestatlimitingspreadcovid
The new production line is expected to operate for five years. It requires m of initial working capital which is expected to remain constant for the next five years. Working capital will not be recovered at the end of the project life. The equipment will have a residual value of million at the end of the life of the project.
The new production line will be located in one of the companys buildings, being presently empty. This building was purchased at million three years ago, for which an offer price of million has recently been received. If the building is retained, the aftertax residual value is expected to be m after years.
Neqis strategic planning division made the following forecasts for the average annual rates of inflation relevant to the project:
Mask prices pa
Direct costs pa
Fixed overhead costs pa
Neqis real cost of capital for projects of similar risk is percent. The general rate of inflation is percent. The marginal tax rate is percent.
Required: a What is the projects actual monetary cost of capital?
b Provide the reasons for the irrelevance of three cash flow items for project consideration.
c Assess the financial viability of the proposed project using nominal actual cash flows. Monetary figures should be in million and intermediate computations should be in decimal places.
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