Question $1$

Great God limited is considering the manufacturing of a new product which will involve the use of new machine. The new machine cost GHS $150,000.$ There is sufficient capacity on this machine to produce the product. Annual sales have been estimated to be $5,000$ units at a selling price of GHS $32$ per unit in year $1$ and expected to increase by $10\%$ every year.

The unit cost of the product would be as follows

GHS

Direct material

$7$

Direct labour $(4$ hours @ GHC $2$ per hr$.)$

$8$

The new machine has a life span of $5$years, after which it would be sold to Death limited for GHS $10,000.$ Direct labour is continually short in supply and as a result, labour resources would have to be diverted from other work which currently earns a contribution of GHS $1\mathrm{.}5$ per labour hour.

The project will require a working capital of GHS $10,000$ at the beginning of the project and increase to GHS $15,000$ in the first year and remain at this level until the end of the project. The company's cost of capital is $20\%.$

Required:

Assess whether the project is worthwhile using the payback period, NPV and PI methods.