Question
T Co plans to buy a machine to make new product. The machine will cost $250,000 and last for four years, at the end of
T Co plans to buy a machine to make new product. The machine will cost $250,000 and last for four
years, at the end of which time it will be sold for $5,000. T Co expects demand for the product to be:
Year Demand (units)
1 35,000
2 40,000
3 50,000
4 25,000
The selling price is expected to be $12.00/unit and the variable cost of production is expected to be $7.80/unit. Incremental annual fixed production overheads = $25,000 per year. Selling price and costs are all in current price terms. Selling price and costs are expected to increase as follows
Selling price : 3% per year; variable cost: 4% per year
Fixed production overheads: 6% per year
Requirement: Calculate the ROCE (T Co's target ROCE = 20%) and state based on this, whether the investment should proceed.
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