Present your arguments to Goel concerning acceptance (or not) of each project. Funds are available for only one product line.Your arguments should use the results from your calculations in (a) and a consideration of the advantages and disadvantages of each method of investment appraisal.
Page 8 PART D INVESTMENT APPRAISAL METHODS Continuing with the surge to expand and continuous look out for new ventures, below proposals are now available for consideration by the company. The Marketing manager suggested that if the company can sell its own Momos sauce bottles or ready-made Momos shell kit, it could be sold for three years, but not after that. The company did some market research and gathered the basic cash flows information. The cost of the market research information was 15,000. On the basis of this research, cash flows are expected to be as follows: Figures in '000 AED Momos sauce bottles 2018 2019 2020 Cash in flows 700 700 825 Momos shell kit 2018 2019 2020 Cash in flows 720 720 1,905 The cost of the new equipment will be 1,555,000 for Momos sauce bottles. This will be spent by the end of December 2017. The cost of the new equipment will be 2,155,000 for Momos shell kit. This will be spent by the end of December 2017. Depreciation of all fixed assets on the straight-line basis of 3 years' useful life. The company usually requires a payback period of less than 2 years. The cost of capital is 10%. The following information is also available: After 1 year After 2 years After 3 years Discount factors 10% 0.909 0.826 0.751 The net present value of the product lines at a discount rate of 25% have been calculated as 124,600 (negative) for Momos sauce bottles and 142,840 (negative) for Momo shell kit. Page 8 PART D INVESTMENT APPRAISAL METHODS Continuing with the surge to expand and continuous look out for new ventures, below proposals are now available for consideration by the company. The Marketing manager suggested that if the company can sell its own Momos sauce bottles or ready-made Momos shell kit, it could be sold for three years, but not after that. The company did some market research and gathered the basic cash flows information. The cost of the market research information was 15,000. On the basis of this research, cash flows are expected to be as follows: Figures in '000 AED Momos sauce bottles 2018 2019 2020 Cash in flows 700 700 825 Momos shell kit 2018 2019 2020 Cash in flows 720 720 1,905 The cost of the new equipment will be 1,555,000 for Momos sauce bottles. This will be spent by the end of December 2017. The cost of the new equipment will be 2,155,000 for Momos shell kit. This will be spent by the end of December 2017. Depreciation of all fixed assets on the straight-line basis of 3 years' useful life. The company usually requires a payback period of less than 2 years. The cost of capital is 10%. The following information is also available: After 1 year After 2 years After 3 years Discount factors 10% 0.909 0.826 0.751 The net present value of the product lines at a discount rate of 25% have been calculated as 124,600 (negative) for Momos sauce bottles and 142,840 (negative) for Momo shell kit
