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R2: NPV: Your company uses a 12% required rate of return to assess investments. You are proposing a new production line to create efficiencies, the
R2: NPV: Your company uses a 12% required rate of return to assess investments. You are proposing a new production line to create efficiencies, the relevant cash flow data is as follows: 1. There is an initial outlay of 136,000 in new machinery, with a further investment of 100,000 at the end of one year to complete the re-engineering 2. Expected sales volumes are forecast as a) Year 1: 70,000 units b) Year 2: 77,750 units c) Year 3: 87,500 units 3. Sales are expected to be held constant at 5 per unit. Variable production costs have historically amounted to 4 per unit, but are expected to be reduced to a new constant rate per unit immediately from Y1 onwards. The percentage savings in production costs would need to exceed what number in order for the new production line to be attractive when measured by Net Present Value? (Assume contribution cash flows occur at the end of each year). Discount factors are: Year 1 = 0.89, Year 2 = 0.80, Year 3 = 0.72, [Long question - 10 marks] R2: NPV: Your company uses a 12% required rate of return to assess investments. You are proposing a new production line to create efficiencies, the relevant cash flow data is as follows: 1. There is an initial outlay of 136,000 in new machinery, with a further investment of 100,000 at the end of one year to complete the re-engineering 2. Expected sales volumes are forecast as a) Year 1: 70,000 units b) Year 2: 77,750 units c) Year 3: 87,500 units 3. Sales are expected to be held constant at 5 per unit. Variable production costs have historically amounted to 4 per unit, but are expected to be reduced to a new constant rate per unit immediately from Y1 onwards. The percentage savings in production costs would need to exceed what number in order for the new production line to be attractive when measured by Net Present Value? (Assume contribution cash flows occur at the end of each year). Discount factors are: Year 1 = 0.89, Year 2 = 0.80, Year 3 = 0.72, [Long question - 10 marks]
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