Q1

Jensen Company produces cars. This company is required by law to buy a machine to recycle waste oil. This project requires an investment of $450,000. The project is expected to produce recycled oil and generate cash flows of $125,000 per year for five years. The cash flows would be received at the end of each year.

The asset is considered 5 years property for depreciation purposes with zero salvage value. The machine would be disposed of on the first day of the fourth year, at which time it would have $110,000 salvage value.

Assume the required rate of return is 8 percent and the income tax rate is 40%.

Required:

1. Determine the net present value of the asset. (10marks)
2. State your recommendation should Jensen buy the machine? Explain (1 mark)]

Year Discounted factor 8%

1. 0.926
2. 0.857
3. 0.794
4. 0.735
5. 0.681
6. 0.30

Q2

Riteway currently produces and sells five different products. Total demand for the products exceeds the firms capacity to produce all of them. The constraint on production is the time available on a special machine. Data on the products and time required on the special machine are summarised in the following chart.

	Product A	Product B	Product C	Product D	Product E
Selling price	$12	$15	$18	$24	$32
Variable manufacturing cost	$8	$9	$11	$12	$18
Variable marketing cost	$1	$1	$3	$2	$6
Machine hours needed per unit	$0.2	$0.3	$0.25	$0.5	$0.4
Maximum unit demand per period	10,000	7,500	20,000	1,500	2,000

The firm has only 5500 hours of time available on the special machine per period. Fixed costs are $110,000 per period.

Sunshine company offers Riteway to supply and to market products A,B,C,D and E for $10,$12,$15,$15,$25 respectively.

Requirements

1. What is the production plan for each product to be produced and sold to maximize income? ( 10 marks)
2. What is the profit/loss of that production plan (2 marks)
3. If you were the consultant of this company, should you recommend Riteway to continue with the production plan or should Riteway take another strategy to improve the profit? (6 marks)