Question
PT Co, a large stock-exchange-listed company, is evaluating an investment proposal to manufacture Product W33, which has performed well in test marketing trials conducted recently
PT Co, a large stock-exchange-listed company, is evaluating an investment proposal to manufacture Product W33, which has performed well in test marketing trials conducted recently by the companys research and development division. Product W33 will be manufactured using a fully-automated process which would significantly reduce noise levels from PT Cos factory. Table Q1(a) relates to the information of the investment proposal. The research and development division has prepared the following demand forecast as a result of its test marketing trials. The forecast reflects expected technological change and its effect on the anticipated life-cycle of Product W33 as shown in Table Q1(b). It is expected that all units of Product W33 produced will be sold, in line with the companys policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is expected at the end of four years, when production of Product W33 is planned to end. For investment appraisal purposes, PT Co. uses a nominal (money) discount rate of 10% per year and a target return on capital employed of 30% per year. Calculate:
(i) Net present value.
(ii) Internal rate of return.
(iii) Return on capital employed (accounting rate of return) based on average investment.
Table O1(a): Information on proposal Table Q1(b): Demand forecast for Product W33Step by Step Solution
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