You have been provided with the following details relating to this project: a. The research and development division has spent GHS300,000 on market research, and the directors of SBL Ltd are encouraged by the findings. Good Manufacturing Practice (GMP) will require investment in a new machine, which is expected to cost GHS750,000 payable immediately upon commencement of the project. The sales proceeds of the machine at the end of its five-year useful life are expected to be GHS150,000. The company also makes initial net investment in the working capital of GHS100,000. The net working capital investment will increase to GHS150,000 and GHS210,000 in years 2 and 4 respectively. b. The research and development division has estimated that 70,000 units of drugs will be sold in Year 1, with a 10% annual increase in Years 2 to 4 inclusive, and no growth in sales volume in Year 5. C. Total fixed operating costs will be GHS495,000 per year. This figure includes an allocated annual fixed charge from Head Office amounting to GHS11,500 per month relating to the overheads and the annual depreciation relating to the new machinery acquired for this project. d. Depreciation is charged on a straight-line basis over the 5-year life at 20%, and the scrap value of GHS150,000 is expected to be realised. e. Acceptance of this project will mean that other work capable of making a net contribution of GHS350,000 for each of the five years will not proceed. Further research and development costs of GHS127,500 have been contracted and will be paid for in Year 1. f. The selling price of the new product has been forecasted at GHS58 per unit for the first two years, and will increase by 10% in Year 3 of the project. It will remain at the Year 3 price for the remainder of the project. All sales will be on a cash basis. 9. The forecasted gross margin is 60%. Cost of sales will consist entirely of materials which will be paid for immediately. The project will operate on a Just-In-Time (J.I.T) basis with no opening or closing inventory. h. Other variable costs will amount to GHS20 per unit and are expected to stay constant for the five years of the project. 1. Distribution agency fees amounting to 5% of the annual sales for the previous year will be paid, commencing in Year 2. The fee for years 4 and 5 will be paid in the last year of the project. There is no fee for Year 3. j. The total gross marketing costs have been estimated at GHS950,000, 30% of which will be paid before the project commences. The remaining amounts which are subject to the project being undertaken will be paid in equal annual instalments. k The company's cost of capital is 15%. The company expects investments to deliver positive pre-tax Net Present Value over the life of the five-year project and a maximum payback period of three years. The average industry payback period for such projects is 4 years. You may ignore taxation SBL'S CEO has requested that on the basis of the information provided you appraise this investment proposal. Required Prepare extracts from a report to the management of SBL with the information presented in the following order: a) A table showing the results of your calculations and initial recommendations based on i. Payback Period ji. Accounting Rate of Return the Discounted Payback Period iv. NPV method; Internal Rate of Return vi. Modified Internal Rate of Return a. Include any detailed workings on separate pages as an appendix to your extracts from the report. For the NPV calculation, figures may be rounded to the nearest cedi. For the Payback calculation, founding to two decimal places is required. (15 marks) b. Evaluate five non-financial factors that should be considered by the company in deciding whether or not to invest in the new Good Manufacturing Practice (GMP). (10 marks) V
