The Company purchases vehicle parts such as tailgates, bumpers, headlights, electrical and mechanical components, and body panels from different importers. There are delays in getting other vehicle parts due to the worldwide shortage of plastics, other raw materials, and the movement of goods. With other contributing factors, like, the well$-$publicised driver shortages in the UK$.($The lack of sufficient semiconductors caused widespread production cuts around the globe. Worldwide, carmakers are estimated to cut a total of $19\mathrm{.}6$ million vehicles out of their production schedules between $2021$ and $2023).$

The Adam family faced various challenges during their journey, including securing financing for expansion and navigating supply chain disruptions. To mitigate the risks associated with automotive market fluctuations, Adam Cars Limited invested in technology and systems for real$-$time supply chain visibility, enabling them to detect potential disruptions early and respond proactively. To fund this expansion, the company secured a $30$ million bank loan with a fixed interest rate of $4\%$ per annum. The loan is scheduled to be repaid in December $2028.$

Income statement

$2023$

$0002022$

$000$

Revenue Note $1143,450123,000$

Cost of sale Note $288,93973,800$

Gross profit $54,51149,200$

Administrative expenses Note $343,05038,500$

Operating profit $11,46110,700$

Interest charges @$4\%1,2001,200$

Profit$/$loss before tax $10,2619,500$

Taxation $2,7004,300$

Profit loss after Tax $7,5615,200$

Statement of financial position

$2023$

$`0002022$

$000$

Non$-$current assets

$41,00040,000$

Current assets $($Note $4)33,50031,800$

Total Assets $74,50071,800$

$2023$

$`0002022$

$`000$

Equity

Ordinary shares capital $8,0006,000$

Retained earnings $29,50026,000$

$37,50032,000$

Non$-$current liabilities $($Note $5)30,00030,000$

Current Liability $($Note $6)7,0009,800$

Total Assets and Liabilities $74,50071,800$

Notes to the financial statements

Note $1$: Revenue

Note $1$: Revenue $2023$

$`0002022$

$`000$

Economy $22,80018,000$

Deluxe $120,650105,000$

Total Revenue $143,450123,000$

Sales volumes

$2023$

Units $2022$

Units

Economy $1,2001,125$

Deluxe $3,1753,000$

Total sales $4,3754,125$

Note $2$: Cost of sales

$2023$

$`0002022$

$000$

Material $62,25751,660$

Production staff costs $26,68222,140$

Total cost of sale $88,93973,800$

No$.$ of production staff $890794$

Note $3$: Administrative expenses

$2023$

$`0002022$

$`000$

Director$$s salaries $900850$

Other salaries $9,0008,000$

Energy cost $13,00012,600$

Telephone $9,1008,050$

Other expenses $11,0509,000$

Total $43,05038,500$

No of directors $99$

Other employees $180178$

Note $4$: Current assets

$2023$

$`0002022$

$`000$

Inventory: Raw material $7,5007,000$

Inventory: finished goods $12,00011,800$

Trade receivables $11,50011,000$

Cash and bank $2,5002,000$

Total Assets $33,50031,8000$

Note $5$: Non$-$current liabilities

$20232022$

$`000`000$

Ten$-$year bank loan $30,00030,000$

Note $6$: Current liabilities

$20232022$

$`000`000$

Trade payables $1,9003,200$

Corporate tax liability $2,7004,300$

Other payables $2,4002,300$

Total Liabilities and equity $7,0009,800$

Diversification in production

Over the past $12$ months, the board of directors has grown increasingly concerned about the rising number of competitors. Consequently, they have embarked on an investigation into a new line of products. After months of research aimed at mitigating risks associated with fluctuations in the automotive market, Adam Cars is considering diversifying its product offerings. This diversification may involve expanding into related industries, such as electric scooters, electric bikes, or mobility solutions. To finance this expansion, the company is seeking a $90$ million bank loan. The directors must now decide whether to invest $90$ million in production equipment for the new product line. This equipment is expected to last for five years.

The finance manager has forecast the annual return that the company would get from this investment as follows:

$000$

Year $140,000$

Year $225,000$

Year $320,000$

Year $420,000$

Year $520,000$

For the purposes of any investment appraisal calculations, it is assumed that the annual returns represent the increase in cash and profit from the launch of the new product line.

The board of directors have indicated that they would like the investment to achieve payback within $4$ years. They have also set Accounting Rate of Return targets of $30\%$ based on initial investment and $60\%$ based on the average value of the investment.

The company calculated its cost of capital to be $7\%$ per annum on $31$ December $2023.$

Required

Investment appraisal

Provide an analysis of the proposed diversification investment, as outlined in the case study, applying a selection of non$-$discounted and discounted investment appraisal techniques.