QUESTION 5 APPAREL Co. Lid is a clothing accessories manufacturing company that is recovering from a loss-making venture into magazine publication three years ago. The company plans to launch two new products, HATs and TIES, at the start of July 20X3, which it believes will each have a life cycle of four years. Expected sales volumes for the two products are as follows: Page 5 of 8 continue 7002EFA The selling price and direct material costs for each product in the first year will be as follows: Incrementai fixed production costs are expected to be fimilion in the first year of operation and are apportioned on the basis of sales value. Advertising costs will be $500,000 in the first year of operation and then 200,000 per year for the following two years. There are no incrementai non-production foxed costs other than advertising costs. In order to produce the two products, investment of E1 milion in premises, E imilison in machinery and E1 million in working capital will be needed, payable at the start of duly 20X7. Selling price per unit, direct material cost per unit and incremental fixed production costs are expected to increase atter the first year of operation due to inflation: These infation rates are applied to the standard selling price and direct material cost data provided above. Working capital will be recovered at the end of the fourth year of operation, at which time production will cease and APPAREL Co Ltd expects to be able to recover 1.2 million from the sale of premises and machinery. All staff involved in the production and sale of Alpha and Beta will be redeployed elsewhere in the company. APPAREL. Co. Lid pays tax in the year in which the taxable proft occurs at an annual rate of 25%. For the purpose of reporting accounting profit. APPAREL Co Ltd. depreciates machinery on a straight-line basis over four years. APPAREL Co LA. uses an after-tax money discount rate of 13% for investment appraisal. Required: a. Calculate the net present value of the proposed investment in products HATS and TIES as at 30 June 207, (12 marks) b. Calculate the intemal rate of retum (tRR) of the proposed investment in products HATS and TIES as at 30 June 207. (6 marks) c. Identify and discuss any hikely limitations in the evaluation of the proposed investment in HATS and TIES. (7 marks) QUESTION 5 APPAREL Co. Lid is a clothing accessories manufacturing company that is recovering from a loss-making venture into magazine publication three years ago. The company plans to launch two new products, HATs and TIES, at the start of July 20X3, which it believes will each have a life cycle of four years. Expected sales volumes for the two products are as follows: Page 5 of 8 continue 7002EFA The selling price and direct material costs for each product in the first year will be as follows: Incrementai fixed production costs are expected to be fimilion in the first year of operation and are apportioned on the basis of sales value. Advertising costs will be $500,000 in the first year of operation and then 200,000 per year for the following two years. There are no incrementai non-production foxed costs other than advertising costs. In order to produce the two products, investment of E1 milion in premises, E imilison in machinery and E1 million in working capital will be needed, payable at the start of duly 20X7. Selling price per unit, direct material cost per unit and incremental fixed production costs are expected to increase atter the first year of operation due to inflation: These infation rates are applied to the standard selling price and direct material cost data provided above. Working capital will be recovered at the end of the fourth year of operation, at which time production will cease and APPAREL Co Ltd expects to be able to recover 1.2 million from the sale of premises and machinery. All staff involved in the production and sale of Alpha and Beta will be redeployed elsewhere in the company. APPAREL. Co. Lid pays tax in the year in which the taxable proft occurs at an annual rate of 25%. For the purpose of reporting accounting profit. APPAREL Co Ltd. depreciates machinery on a straight-line basis over four years. APPAREL Co LA. uses an after-tax money discount rate of 13% for investment appraisal. Required: a. Calculate the net present value of the proposed investment in products HATS and TIES as at 30 June 207, (12 marks) b. Calculate the intemal rate of retum (tRR) of the proposed investment in products HATS and TIES as at 30 June 207. (6 marks) c. Identify and discuss any hikely limitations in the evaluation of the proposed investment in HATS and TIES. (7 marks)
