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SECTION - B (Total 70 Marks) Q3. ABC steel plant industry plans to manufacture a product. The product needs a special component. The industry has
SECTION - B (Total 70 Marks) Q3. ABC steel plant industry plans to manufacture a product. The product needs a special component. The industry has reviewed that the special component can be produced in the plant or bought in. An investment is required to start the production of the component for which two mutually exclusive projects A and B representing different production processes are available. The alternative option is to buy in from alother company representing project C. The details of projects A and B are given in Table 3: (i) Using the information from table 3 and Discount Cash Flow criteria, calculate Pay Back Period (PBP), Account Rate of Return (ARR), Net Present Value (NPV) and Internal Rate Return (IRR) for project A & Project B if the industry plans to manufacture 6,000 units per year. [28 Marks] [Marking Rubrics: Back Period (PBP) for the project A & project B - 4 Marks, Account Rate of Return (ARR) for project A & project B - 4 Marks, Net Present Value (NPV) for the project A & project B - 8 Marks, and Internal Rate Return (IRR) for the project A & project B - 12 Marks.] (ii) Using the annual cost data from table 3, determine which project incurs less cost if the industry considers producing 7,500 units per year. [4 Marks] (ii) Determine the Break-Even quantity and margin of safety (units and value) If the company sells 8,000 units of new product per year at a price of RO 250 [8 Marks] Table 3 Description Project-A Project-B Capital (RO) 367,790 479,780 Life (years) 15 15 Capacity (units per year) 10,000 12,000 Salaries per year (RO) 45,000 50,000 Other fixed costs per year (RO) 40,000 85,000 Wages per year (RO) 70,000 80,000 e 1 Cost of materials per year (RO) 215,930 275,440 Other variable costs per year (RO) 35,000 40,000 Scrap value at the end of the year (RO) 33,070 40,400 Cost of capital (%) 18 18
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