Question
The finance department of Eco Co provides some estimation of a new product. Accordingly, the annual production capacity will be kept as 10,000 units per
The finance department of Eco Co provides some estimation of a new product. Accordingly, the annual production capacity will be kept as 10,000 units per year for 4 years. The selling prices and relevant costs are expected to vary year by year and have been estimated as:
Year | 1 | 2 | 3 | 4 |
|
|
|
|
|
Selling price/unit | 728 | 757 | 787 | 819 |
Variable cost/unit | 315 | 331 | 347 | 365 |
Fixed cost | 210000 | 220500 | 231525 | 243101 |
The company needs to purchase new machinery costing 6 million for the plan, which would last for four years and at the end of year four, the scrap value is expected to be 300,000. In terms of working capital, 500,000 is required initially to start the project. The company has a cost of capital of 12% per year.
Required:
(a) Apply different investment appraisal methods to evaluate the financial acceptability of the project, including:
(i) PBP (Payback period)
(3 marks)
(ii) NPV (Net Present Value)
(8 marks)
iii) IRR (Internal rate of return).
(4 marks)
Note: Please ignore general inflation and taxation;
(b) Identify the primary financial objective of the business and explain how to encourage managers to achieve it, eliminating agency issues.
(10 marks)
Total: 25 marks
Note: I need this question with quality
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