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- May 7, 2023 at 6:13 pm #684022boaz7bmParticipant
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BRT Co has developed a new confectionery line that can be sold for $5.00 per box and that is expected to have continuing popularity for many years. The Finance Director has proposed that investment in the new product should be evaluated over a four-year time-horizon, even though sales would continue after the fourth year, on the grounds that cash flows after four years are too uncertain to be included in the evaluation. The variable and fixed costs (both in current price terms) will depend on sales volume, as follows. Sales volume (boxes) less than 1 million 1–1.9 million 2–2.9 million 3–3.9 million Variable cost ($ per box) 2.80 3.00 3.00 3.05 Total fixed costs ($) 1 million 1.8 million 2.8 million 3.8 million Forecast sales volumes are as follows. Year 1 2 3 4 Demand (boxes) 0.7 million 1.6 million 2.1 million 3.0 million. The production equipment for the new confectionery line would cost $2 million and an additional initial investment of $750,000 would be needed for set-up. Ignoring inflation, selling price, variable costs, and fixed costs are expected to rise by 3% per year. The equipment could be sold for scrap at the end of year 4 and replaced with a newer machine. Expected scrap value of equipment at the end of four years is $600,000. BRT Co uses a cost of capital of 12% to appraise new investment projects.
Required: Assuming that production only lasts for four years, calculate the net present value of investing in the new product and advise on its financial acceptability.May 8, 2023 at 9:18 am #684041John MoffatKeymaster
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There is no point in simply typing up full question and expecting to be provided with a full answer. We do not offer that service.
You must have an answer in the same book in which you found the question so ask about whatever it is in the answer that you are not clear about and then I will explain.
Have you watched my free lectures on investment appraisal because everything needed to be able to answer this question is explained in my lectures.
This question is from a past Paper FM exam (not an AFM exam) and everything is therefore also explained also in my free Paper FM lectures!
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