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The Company of Research Engine Development (RED) accountant has tocreate a report for Directors to evaluate the below proposal using the DCF method as suggested
The Company of Research Engine Development (RED) accountant has tocreate a report for Directors to evaluate the below proposal using the DCF method as suggested by the Director The report should include an explanation of the DCF method used, together with other factors which the Director should consider in relation to the proposal !
The following profit forecast for the GPS devices for the next four years (all figures are in '000)
Year 2022 2023 2024 2025 Sales 400 600 800 600 Manufacturing Costs: Components: Opening Stock 40 80 80 60 Purchases 200 240 300 180 240 320 380 240 Closing Stock 80 80 60 160 240 320 240 Labour 80 120 120 80 Production Expenses 80 90 92 100 Depreciation 60 60 60 60 Total Manufacturing Cost 380 510 592 480 Trading Profit 20 90 208 120 Administration Expenses 76 98 96 96 Operating Profit (Loss) (56) (8) 112 24 The research and development director is satisfied the project should go ahead as the cumulative profit by the end of 2025 will be (72,000.Original Forecast Revised Forecast Units Price Units Price E E 2022 5,000 160 5,000 150 2023 4.000 120 3,000 100 2024 2,000 80 2025 The average production costs per unit of other devices are: 2022 2023 2024 E E E Variable Costs 120 90 60 Fixed Costs (apportioned) 10 10 10 Total unit costs 130 100 70 The CEO believes that a discounted cash flow (DCF) approach should be used and should include the issues raised by both the production director and the marketing director. Further relevant information is also available: RED's cost of capital is 14%. 80% of sales revenue is assumed to be received in the year of the sales and 20% in the following year, except for 2025 when 100% of sales revenue is assumed to be received. Purchases and relevant costs are payable on a cash basis in the year of incurrence. The present value of (1, at 14%, is: Year 1 (2022) 0.877 (2023) 0.769 (2024) 0.675 (2025) 0.592Step by Step Solution
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