Question

Rustaq Marketing Company has just developed a new brand called NAHL and is analyzing the financial feasibility of the product based on the following information.

1. The estimated sales of NAHL is 30,000 units per year for the next four years. Each unit of NAHL can be sold in the new market for OMR 55.
2. Production cost of each unit of NAHL at today’s prices are estimated as follows:

1. Variable materials OMR7.00
2. Variable labor OMR 9.00
3. Variable overheads OMR 10.00
4. In addition, annual fixed production costs including straight line depreciation at today’s prices will amount to OMR900,000.

3. Product development cost of NAHL amounts to OMR 14,000.
4. Company need to invest in a new machinery to produce the new product the new acquisition of new machinery would cost OMR 1,700,000 payable immediately. The machinery can be used for the production of NAHL for four years.
5. The rate of tax on taxable profits is 30%.
6. The machinery will have a salvage value of 10% of the original cost of the machine at the end of its life.
7. The company's real rate of return is estimated to be 5% pa, and its nominal rate of return is 10%.

Required:

1. You are required to find the Net Present value after adjusting inflation by using following methods:

1. Discounting money cash flows.
2. Discounting real cash flows.

Answer 1