Question $3$

Goji Ltd produces a wide range of toys. Recently, it has developed a new product and the directors of the company are now considering whether this product should be put into production.

The following information is produced to help evaluate the commercial viability of the new product.

$1.$ The cost of developing the new product was RM$130,000.$ In addition, market research was carried out by a firm of marketing consultant at a cost of RM$90,000.$

$2.$ The company expects to sell $10,000$ units of new product per year for each of the next five years. The selling price of each unit will be RM$65.$

$3.$ If production does not go ahead, machinery will be sold immediately for RM$790,000.$ However, if production goes ahead, the machinery will be sold at the end of five years for RM$70,000.$

$4.$ Additional working capital of RM$150,000$ will be required immediately in order to support production of the new product. This can be released at the end of the production period.

$5.$ To produce the new product, each product requires one kilo of Type A and three kilos of Type B material.

$($a$)$ Type A material was purchased at a cost of RM$14$ per kilo in the past but now the supplier has raised the price to RM$15$ per kilo.

$($b$)$ Type B material was purchased at RM$2$ per kilo in the past but now the replacement cost is RM$2\mathrm{.}50$ per kilo.

$6.$ Labour costs are estimated at RM$12$ per unit of product.

$7.$ Total fixed costs apportioned to the new product will be RM$200,000$ per annum of which RM$60,000$ per annum is an incremental cost as a direct result of the decision to produce the new product.

The company has a cost of capital of $12\%.$

Discount factors:

Year $12\%$

$10\mathrm{.}893$

$20\mathrm{.}797$

$30\mathrm{.}712$

$40\mathrm{.}636$

$50\mathrm{.}567$

Year $18\%10\mathrm{.}84720\mathrm{.}71830\mathrm{.}60940\mathrm{.}51650\mathrm{.}437$ Required:

For this new product investment,

$($a$)$ List and explain two non$-$relevant costs.

$($b$)$ Prepare the net cash flows table.

$($c$)$ Calculate the net present value $($NPV$).$

$($d$)$ Calculate the Internal Rate of Return $($IRR$)$ to the nearest percent. $($e$)$ State whether the Goji Ltd should produce this product.