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Question 3 Zam-Zam Co. is considering the introduction of a new product to its current range of products in order to capture a bigger market
Question 3 Zam-Zam Co. is considering the introduction of a new product to its current range of products in order to capture a bigger market share. A new investment in robotic technology costs $2.0 million now, with a useful life of five years. The asset's disposal value will be $200,000 at the end of the it's useful life. Sales from the new product are forecast at 5,000 units in Year 1 and 6,000 units in Year 2, rising to 9,000 units in each of Years 3 and 4 and to 13,000 units in Year 5. The selling price per unit will be $90 in Year 1 and Year 2. From Year 3 onwards the selling price will be increased to $120 per unit and will remain at this price. Variable cost of sales is estimated at $30 per unit. Straight-line depreciation of the machine would be in place in each year. No other future incremental fixed costs would be incurred. However, the company has already incurred expenditure of $40,000 for collecting primary data a few months ago and has decided to write-off this expenses against profits made in the current year. Assume all cash flows, apart from the investment in robotic technology, occurs at the end of each year. The cost of capital is 10% per annum. Discount factors are as follows: DF @ 10%: Year 1: 0.909 Year 2: 0.826 Year 3: 0.751 Year 4: 0-683 Year 5: 0-621 DF @ 20%: Year 1: 0.833 Year 2: 0.694 Year 3: 0.579 Year 4: 0.482 Year 5: 0-402 Required: a) Ascertain the net cash flows for each year of the project (Year 0 to 5). (6 marks) b) Ascertain the discounted Payback Period and Net Present Value (NPV) of the project. Should the project be accepted? (8 marks) c) Ascertain the Internal Rate of Return (IRR) for the project. (4 marks) d) Explain TWO (2) advantages of the Net Present Value Method (2 marks) (Total: 20 marks)
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