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Question 2 ( 2 5 marks ) Herald Lid introduced a now product, NEW ERA, is la range lasat year. The machine used is mould

Question 2(25 marks)
Herald Lid introduced a now product, NEW ERA, is la range lasat year. The machine used is
mould each ism is a bottieneck in the production process meaning that a maximum of 5,100 unica
per annum can be manufactured.
The NEW ERA product hara been a huge success in the maketplace and as a resut, all ikms
manulactured are sold. The marketing department has prepared the following demand forocast for
fubure years ias a result of foedback from customers.
The divecters are now considering investing in a second machine that will allow the company to
satisty the excess demand. The following information relating to this investment proposal has now
been prepared:
Intal investment
Micomum asditional nutpul
Cument selling price
Variable coprating costs
Fond cperating ceriss
520,000
5,000 unts
350 per unil
328 per unk
$15,000 per year
FACULTY OF COMMEREEE, MANAGEMENT AND LAW
OLD CURRICULUM MODULES
If production remained at 5,100 units, the current selling pilce would be expected to continue
throughout the remainder of the life of the product. Howcver, if production is increased, it it
expocied that the selling price wil fall to $45 per unit for all unica sold. Again, this will last for the
remainder of the ife of the product.
No terminal walue or machinery scrap walue is expectod at the end of four years, when production
of NEW ERA is plamed to end. For imesatment appralsal purpoess, Herald waes a nominal
discount rabe of 10% per year and a target retum on captal employed of 20% per year. ignore
taxtion.
Required:
(a)Calculate the following values for the imesatment proposal:
(i)net present value;
(i) internal rate of reoum;
(ii)retum on capial employed (acoouning rate of retum) based on intial imvestment; and.
(iv)decounted paryback period
(14 marks)
(b)Discuss your findings in each section of (b) above and advise whether the investment proposal
it financially acceptable.
(5 marks)
(c)Explain briefly the ley sbeps that should be included in a companys capital budgefing process.
(6 marks)
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