9) Magic International has launched a new article of fabric for the winter season. Promotion campaign...

 

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9) Magic International has launched a new article of fabric for the winter season. Promotion campaign took place by one of the famous marketing group of the region. It Page 6 of 8 has been expected that promotion will help to enhance the market demand and subsequently the sales & production volumes as well. Following are the four years figures based on estimations; Year Sales & Production Units Selling price per Article (Rs) 1 3 4 2 100,000 60,000 50,000 40,000 30 28 26 24 Financial Information for the article is as follows: Direct Material Cost 6 Rs per article Other variable Cost 5 Rs per article Fixed Costs 3 Rs per article Advertising cost are expected to be 300,000 Rupees in first two years and 200,000 Rupees in third and fourth year respectively. Fixed cost represent incremental cash fixed production over heads. New Fabric will be produced on machine costing 1,000,000 Rupees. Machine is having a useful life of 8 years. Company can claim capital allowance against manufacturing of article. Capital allowance claimed on straight line basis over four years. Company pays tax on profit at rate of 30 % per year and tax liabilities are settled in the year in which they arise. Magic uses an after-tax discount rate of 10.5 % when appraising new capital investment. Calculate net present value and IRR of the proposed investment and comment on your findings. 9) Magic International has launched a new article of fabric for the winter season. Promotion campaign took place by one of the famous marketing group of the region. It Page 6 of 8 has been expected that promotion will help to enhance the market demand and subsequently the sales & production volumes as well. Following are the four years figures based on estimations; Year Sales & Production Units Selling price per Article (Rs) 1 3 4 2 100,000 60,000 50,000 40,000 30 28 26 24 Financial Information for the article is as follows: Direct Material Cost 6 Rs per article Other variable Cost 5 Rs per article Fixed Costs 3 Rs per article Advertising cost are expected to be 300,000 Rupees in first two years and 200,000 Rupees in third and fourth year respectively. Fixed cost represent incremental cash fixed production over heads. New Fabric will be produced on machine costing 1,000,000 Rupees. Machine is having a useful life of 8 years. Company can claim capital allowance against manufacturing of article. Capital allowance claimed on straight line basis over four years. Company pays tax on profit at rate of 30 % per year and tax liabilities are settled in the year in which they arise. Magic uses an after-tax discount rate of 10.5 % when appraising new capital investment. Calculate net present value and IRR of the proposed investment and comment on your findings.