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Apologies for asking in the wrong forum
It was June 2012 question 5
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biscuits and cakes part
(Or pg91 of bpp rev kit)
Part a
After finding residual income how do we answer the question whether the investment should be undertaken or not.and how is residual income of the investment negative 132000-212000=(80,000).from where do we get 132000Using residual income, if the total RI increases then we should undertake the project. If the total RI decreases then we not.
If the project itself gives a positive RI, then the total RI will increase and we should do the project. If the project’s RI is negative, then the total RI will decrease and we should not do the project.With regard to the 132,000, the current contribution for B is 600,000 per month. The question says that the new machinery will increase the contribution by 8.5%, so the extra contibution will be 8.5% x 600,000 per month, or (multiplying by 12) an extra 612,000 per year.
The depreciation on the new machine will be (2,120,000 – 200,000) / 4 = 480,000 per year.So the extra profit from the machine will be 612,000 – 480,000 = 132,000 per year.
Thanks a lot 🙂
One doubt
Here the residual income is positive so why is the investment not good.
How do we get 212,000 in 132000-212000=(80000)The residual income is not positive – it is negative!!
It is the profit (132,000) less the notional interest (10% x $2.12M which is 212,000)
You really should watch the free lectures (and if necessary the relevant F2 lectures because this topic is revision of F2)
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