Question 3 (25 marks)

Aldersley Ltd is evaluating the investment in new machinery to manufacture Product A. Machine X is being considered to manufacture Product A. The following table shows the expected production units of Product A:

Product A Year 1 19 000 Year 2 20 000 Year 3 20 000 Year 4 19 000

Product A will sell for N$20 per unit and will have variable costs of N$10 per unit.

Fixed costs (inclusive of straight-line depreciation of the machine) will be N$90 000 per annum for product A. The unit selling price, all annual fixed and unit variable costs will remain constant over the four-year period.

The machine under consideration will cost N$310 000 and it will have a residual value of N$30 000 after 4 years of use.

The company has a cost of capital of 10% per annum.

Required Marks

Sub-

total

Total 3.1

Calculate the project's sensitivity to: (i) change in cost of capital

1. change in variable cost
2. change in sales volume
3. change in selling
4. change in fixed costs

20 20 3.2 Explain the significance of the figures calculated in 3.1 above 5 25 Total 25