Question1

Zayith Ghana Ltd is into the production of Zalu. However, at a recent Board meeting, there was a

Proposal for the production of Zele, a new seven-octave voice emulation implant. As a result, Zayith

Investigated the marketing potential of the Zele. Zayith sent a questionnaire to consumers in three

markets: Accra, Kumasi, and CapeCoast. The results of the three questionnaires were much better

than expected and supported the conclusion that the Zele could achieve a 10 to 15 percent share of

the market. Ofcourse, some people at Zayith complained about the cost of the test marketing,

which was GH50,000. Zayith Ghana Ltd projects unit sales for Zele as follows:

year	Unit sales
1	8300
2	9200
3	10400
4	9800
5	8400

However, the introduction of this Zele is expected to lead to 1,000units per annum drop in sales

Zalu. The selling price per unit for Zalu is GH100 while the variable cost is GH70. This has no tax implications for Zele. Production of Zele will require GH150,000 in networking capital to start and additional networking capital investments each year equal to 15 percent of the projected sales for

That year. In the final year of the project, networking capital will decline to zero as the project is

Wound down. In other words, the investment in working capital is to be completely recovered by the

End of the projects life. Total fixed costs are GH240,000 per year, variable production costs are

GH190 per unit, and the units are priced at GH345 each. It will cost Zayith GH2,000,000 to

Procure the equipment needed to produce Zele. This is a high-tech equipment which is not available

In the country and will therefore have to be imported from USA. It will cost the company

GH200,000 in custom duties and freight charges. Again, the installation of the equipment will cost

Zayith GH100,000. Because the implants are intended for professional singers, this equipment is

Depreciated using the straight-line basis. In five years, this equipment can be sold for about 20

Percent of its acquisition cost. The cost of acquisition, custom duties and freight charges, and

Installation including initial working capital investment is to be financed partly by a loan from Swez

Bank to the tune of GH1,000,000 at an interest rate of 15% and the remaining financed from the

Internal resource of the firm. Mr. Qwesi, the Finance Director has estimated the beta of the project

To be 2. 5 and the average return for stocks traded on the Ghana Stock Exchange to be 10% while the

Rate on Government of Ghana traded Treasury bills is 5%.

Required:

1. Evaluate the project using the NPV and recommend whether Zayith should go ahead with the

production Zele. (14marks)

2. Discuss three (3) business factors (other than the formal financial investment appraisal already conducted) that Zayith should consider before deciding whether to proceed.

(6marks)