Beacon Chemicals plc is considering buying some equipment to produce a chemical named X14. The new...

Beacon Chemicals plc is considering buying some equipment to produce a chemical named X14. The new equipment’s capital cost is estimated at GHC100,000. If its purchase is approved now, the equipment can be bought and production can commence by the end of this yaer. GHC50,000 has already been spent on research and development work. Estimates of revenue and costs arising from the operation of the new equipment appear below:

	Year 1	Year 2	Year 3	Year 4	Year 5
Sales price (GHC per litre)	100	120	120	100	80
Sales volume (litres)	800	1,000	1,200	1,000	800
Variable cost (GHC per litre)	50	50	40	30	40
Fixed costs (GHC000)	30	30	30	30	30

If the equipment is bought, sales of some existing products will be lost, and this will result in a loss of contribution of GHC15,000 a year over its life.

The accountant has informed you that the fixed costs include depreciation of GHC20,000 a year on the new equipment. They also include an allocation of GHC10,000 for fixed overheads. A separate study has indicated that if the new equipment were bought, additional overheads, excluding depreciation, arising from producing the chemical would be GHC8,000 a year. Production would require additional working capital of GHC30,000.

For the purposes of your initial calculations ignore taxation.

Required:

Deduce the relevant annual cash flows associated with buying the equipment.\

Deduce the payback period.

Calculate the net present value using a discount rate of 8%.

Hint: You should deal with the investment in working capital by treating it as a cash outflow at the start of the project and an inflow at the end.

Solutions

Expert Solution

Net Cash Flow
	Y0	Y1	Y2	Y3	Y4	Y5
Net Capital Costs
New equipment cost	(GHC 100,000)
Cost of research	(GHC 50,000)

Cash outflow	(GHC 150,000)
Additionl working capital	(GHC 30,000)

Total Cost	(GHC 180,000)


Operating and Maintenance Costs
fixed costs include depreciation of		(GHC 20,000)	(GHC 20,000)	(GHC 20,000)	(GHC 20,000)	(GHC 20,000)
Fixed overheads		(GHC 10,000)	(GHC 10,000)	(GHC 10,000)	(GHC 10,000)	(GHC 10,000)
AdditionalFixed overheads		(GHC 8,000)	(GHC 8,000)	(GHC 8,000)	(GHC 8,000)	(GHC 8,000)
Loss on existing product		(GHC 15,000)	(GHC 15,000)	(GHC 15,000)	(GHC 15,000)	(GHC 15,000)

Total Costs		(GHC 53,000)	(GHC 53,000)	(GHC 53,000)	(GHC 53,000)	(GHC 53,000)

Revenue and Operating Benefits
Sales vol (in litres)		800	1000	1200	1000	800
Price per litre		GHC 100	GHC 120	GHC 120	GHC 100	GHC 80
Sales		GHC 80,000	GHC 120,000	GHC 144,000	GHC 100,000	GHC 64,000
Variable cost per litre		GHC 50	GHC 50	GHC 40	GHC 30	GHC 40
Total variable cost		(GHC 40,000)	(GHC 50,000)	(GHC 48,000)	(GHC 30,000)	(GHC 32,000)
Terminal cash						GHC 30,000
Benefits and Revenue		GHC 40,000	GHC 70,000	GHC 96,000	GHC 70,000	GHC 62,000

Net benfit Before Taxes	(GHC 180,000)	(GHC 13,000)	GHC 17,000	GHC 43,000	GHC 17,000	GHC 9,000

Discounted Cash Flow (@8%)	(GHC 180,000)	(GHC 12,037.04)	GHC 14,574.76	GHC 34,134.79	GHC 12,495.51	GHC 6,125.25


NPV	(GHC 124,707)

from the given data , Payback cann't be calculated as , the payback will be higher than 5 years.

jeff jeffy answered 1 year ago

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