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.

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 2 years ago

Fine Chemicals plc has recently received an invitation to produce a new chemical for supply to...

Fine Chemicals plc has recently received an invitation to produce a new chemical for supply to a textile manufacturer. The invitation is to produce 15,000 kg each year for the next three years at a price of £42 a kg. The following information has been collected which will help the directors to reach a decision on whether to accept the invitation or not: (1)New plant costing £200,000 will need to be bought and paid for at the start of production....

Green Valley Farms is considering either leasing or buying some new farm equipment. The lessor will...

Green Valley Farms is considering either leasing or buying some new farm equipment. The lessor will charge $23,000 a year lease. The purchase price is $63,000. The equipment has a 3-year life after which time it will be worthless. Green Valley Farms uses straight-line depreciation, has a 32 percent tax rate, borrows money at 9 percent, and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next five years. What is the...

Bene Company is considering selling a piece of factory equipment and buying new equipment to replace...

Bene Company is considering selling a piece of factory equipment and buying new equipment to replace it. Identify two cash flows that must be considered and how they would be determined.

Med Inc. is considering the purchase of a new equipment to produce face marks. The equipment...

Med Inc. is considering the purchase of a new equipment to produce face marks. The equipment would be depreciated by the straight-line method over its 4-year life, and would have a $10,000 salvage value. Accounts payable will rise by $5,000 at time 0 but will be recovered at the end of the project’s life. Revenues and annual operating costs are expected to be constant over the project's 4-year life. The other information is shown below. Risk-adjusted WACC 12.0% Equipment purchase...

At Little Green Apple Produce the owner is considering buying a new large walk in cooler...

At Little Green Apple Produce the owner is considering buying a new large walk in cooler for fruits and vegetables. The new cooler cost $150,000. The annual maintenance cost will be $7,000 starting in year two (the first year will be covered under warrantee). An additional employee will be needed to stock the cooler. The employee will make $16/hr, and start part-time at 20 hours per week. Sale of produce will increase by $100,000 in year one and an additional...

Impact of inflation on investments The Choc Shop is considering buying new equipment with an initial...

Impact of inflation on investments The Choc Shop is considering buying new equipment with an initial investment outlay of $32,000. The equipment has a 5-year life with cash inflows in years 1 to 5 of $11,500, $12,000, $12,500, $10,000, and $9,500, respectively. You earn 6% on all your current investments. The economists, however, have forecasted that inflation may rise by 1% or may fall by 1% over the next 5 years. Inflation will only influence the opportunity cost since the...

Most chemical reactions leave either unreacted chemical (like in the limiting reagent problem) or produce unwanted chemicals.

Most chemical reactions leave either unreacted chemical (like in the limiting reagent problem) or produce unwanted chemicals. Why is it important to identify and remove these impurities from reactions involving food sand pharmaceuticals? Terms like solution, acid, base, electrolyte and dilution are used commonly in everyday life. Choose a term from this unit that you commonly hear and explain in what context do you hear it. It the context positive or negative and why. Oxidation of metals is very...

Quincy Quarry is considering buying new equipment. The equipment would cost $60,000, which would be depreciated...

Quincy Quarry is considering buying new equipment. The equipment would cost $60,000, which would be depreciated using MACRS 5-year method over the project’s life of 6 years, and would have a $5,000 salvage value. The anticipated income from the project is $29,000 on the first year. Afterwards, it grows at 3% per year. The cost of goods sold is $8,800, which grows at 5% per year afterwards. The fixed cost is $2,200. The project will require a net working capital...

a) A chemical manufacturer processes two chemicals, Arkon and Zenon, in varying proportions to produce three...

a) A chemical manufacturer processes two chemicals, Arkon and Zenon, in varying proportions to produce three products, A, B, and C. He wishes to produce at least 150 units of A, 200 units of B, and 60 units of C. Each ton of Arkon yields 3 of A, 5 of B and 3 of C. Each ton of Zenon yields 5 of A, 5 of B and 1 of C. i. If Arkon cost Ghc 40 per ton and Zenon...

Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit...

Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch has a first cost of $100,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Annual labor costs would increase $5,000 using the gang punch, but annual raw material costs would decrease $9,000. MARR is 5.0 %/year. What is the present worth of this investment?

Question