Question
The management of an industrial mortar company is examining the production of three new products and in particular a repair mortar (product A), a self-cleaning
The management of an industrial mortar company is examining the production of three new products and in particular a repair mortar (product A), a self-cleaning coating (product B) and a sealant of mixed concrete (product C). The financial data of each investment are shown in the table below.
Product A | Product B | Product C | |
Cost of purchasing equipment () | 290.000 | 360.000 | 200.000 |
Annual revenues () | 110.000 | 120.000 | 80.000 |
Annual operating expenses () | 15.000 | 35.000 | 10.000 |
Equipment salvage value () | 60.000 | 0 | 40.000 |
Equipment useful life (years) | 4 | 8 | 4 |
Annual revenues and annual costs are calculated at the end of the respective year, while the production of new products is expected to take place for many years. Furthermore, the minimum acceptable rate of return set by the company for such investments is 7%.
a) If the company in the context of a conservative strategy decides to proceed with the production of a single product, select based on the following criteria the best product from a financial point of view that the company must develop: (i) present value, (ii) equivalent annual value, (iii) internal rate of return, (iv) repayment period. Comment on any differences in the evaluation results based on the various criteria. b) If the company in the context of a more aggressive market penetration strategy chooses to allocate more funds for the purchase of equipment and in particular up to 700,000, choose the best financial combination of products that the company must develop.
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