Question

In: Accounting

QUESTION 1 Geko PLC is considering the manufacture of a new product. The company has existing...

QUESTION 1

Geko PLC is considering the manufacture of a new product. The company has existing buildings that could be sold to buyers for R 120,000. The balance sheet records the building as having a value of R 60,000. The new product, which has a life of 5 years, will require installation of sophisticated machinery. This will cost R 200,000.   At the end of its life, the machine can be sold for R 10,000. Depreciation should be charged on the machine at 25 per cent using the reducing balance method. Demand for the new product is expected to be 4,000 units in year 1 and 7,000 units in each of years 2 to 5. The sale price will be R 110 per unit; direct labour, direct material and variable overheads will cost R 60 per unit and additional fixed expenses of R 50,000 per annum will be incurred. An investment in working capital is required in year 0 of R 75,000. This will be increased to R 100,000 in year 1. No further increases are required over the life of the project. Assume that the company pays corporation tax at 24 per cent on its taxable profit a year after the end of the year and requires a rate of return of 10 per cent per annum after tax on this type of project.

Use NPV to determine whether the project is acceptable or not. Show all your calculations and state assumptions (if any) that has been made.

Solutions

Expert Solution

Geko PLC is considering the manufacture of a new product. The company has existing buildings that could be sold to buyers for R 120,000.


Related Solutions

QUESTION 1 Geko PLC is considering the manufacture of a new product. The company has existing...
QUESTION 1 Geko PLC is considering the manufacture of a new product. The company has existing buildings that could be sold to buyers for R 120,000. The balance sheet records the building as having a value of R 60,000. The new product, which has a life of 5 years, will require installation of sophisticated machinery. This will cost R 200,000.   At the end of its life, the machine can be sold for R 10,000. Depreciation should be charged on the...
A company is considering constructing a plant to manufacture a proposed new product. The land costs...
A company is considering constructing a plant to manufacture a proposed new product. The land costs $350,000​, the building costs $500,000​, the equipment costs $250,000​, and $80,000 additional working capital is required. It is expected that the product will result in sales of $750,000 per year for 8 ​years, at which time the land can be sold for $350,000​, the building for $350,000​, and the equipment for $40,000.All of the working capital would be recovered at the EOY 8.The annual...
A company is considering constructing a plant to manufacture a proposed new product. The land costs...
A company is considering constructing a plant to manufacture a proposed new product. The land costs $300,000 the building costs $600,000 the equipment costs $250,000 and $100,000 additional working capital is required. It is expected that the product will result in sales of $750,000 per year for 10 years, at which time the land can be sold for $400,000, the building for $350,000, and the equipment for $50,000. All of the working capital would be recovered at the end of...
The company is considering a new assembly line to replace the existing assembly line. The existing...
The company is considering a new assembly line to replace the existing assembly line. The existing assembly line was installed 3 years ago at a cost of $90,000; it was being depreciated under the straight-line method. The existing assembly line is expected to have a usable life of 6 more years. The new assembly line costs $120,000; requires $9,000 in installation costs and $5,000 in training fees; it has a 6-year usable life and would be depreciated under the straight-line...
Macon Company is considering a new assembly line to replace the existing assembly line. The existing...
Macon Company is considering a new assembly line to replace the existing assembly line. The existing assembly line was installed 3 years ago at a cost of $90,000; it was being depreciated under the straight-line method. The existing assembly line is expected to have a usable life of 6 more years. The new assembly line costs $120,000; requires $9,000 in installation costs and $5,000 in training fees; it has a 6-year usable life and would be depreciated under the straight-line...
Macon Company is considering a new assembly line to replace the existing assembly line. The existing...
Macon Company is considering a new assembly line to replace the existing assembly line. The existing assembly line was installed 3 years ago at a cost of $90,000; it was being depreciated under the straight-line method. The existing assembly line is expected to have a usable life of 6 more years. The new assembly line costs $120,000; requires $9,000 in installation costs and $5,000 in training fees; it has a 6-year usable life and would be depreciated under the straight-line...
Macon Company is considering a new assembly line to replace the existing assembly line. The existing...
Macon Company is considering a new assembly line to replace the existing assembly line. The existing assembly line was installed 3 years ago at a cost of $90,000; it was being depreciated under the straight-line method. The existing assembly line is expected to have a usable life of 6 more years. The new assembly line costs $120,000; requires $9,000 in installation costs and $5,000 in training fees; it has a 6-year usable life and would be depreciated under the straight-line...
Lincon Company is considering a new assembly line to replace the existing assembly line. The existing...
Lincon Company is considering a new assembly line to replace the existing assembly line. The existing assembly line was installed 2 years ago at a cost of $105,000; it was being depreciated under the straight-line method. The existing assembly line is expected to have a usable life of 5 more years. The new assembly line costs $150,000; requires $5,000 in installation costs and $4,000 in training fees; it has a 5-year usable life and would be depreciated under the straight-line...
Macon Company is considering a new assembly line to replace the existing assembly line. The existing...
Macon Company is considering a new assembly line to replace the existing assembly line. The existing assembly line was installed 3 years ago at a cost of $90,000; it was being depreciated under the straight-line method. The existing assembly line is expected to have a usable life of 6 more years. The new assembly line costs $120,000; requires $9,000 in installation costs and $5,000 in training fees; it has a 6-year usable life and would be depreciated under the straight-line...
Macon Company is considering a new assembly line to replace the existing assembly line. The existing...
Macon Company is considering a new assembly line to replace the existing assembly line. The existing assembly line was installed 2 years ago at a cost of $90,000; it was being depreciated under the straight-line method. The existing assembly line is expected to have a usable life of 4 more years. The new assembly line costs $120,000; requires $8,000 in installation costs and $5,000 in training fees; it has a 4-year usable life and would be depreciated under the straight-line...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT