A privately owned company producing shipping containers is considering an investment into the production of a new container. The company spent £12,000 on a feasibility study, which suggests that there is demand for 20 containers per month for the next four years, selling for £10,000 each. The project with require additional investment in equipment and factory of £1,700,000, which depreciates on a straight-line basis over the four years with no salvage value at the end. A supervisor is hired to oversee the project, who earns £30,000 per year and will stay at the company even if the project isn’t undertaken.

One container uses 2,500kgs of steel. priced of £1 per kg, and an additional £4,000 of other inputs. Current fixed overheads are £225,000 per year, which will increase by £5,000 if the project is undertaken. Cost of capital is 15% per year. All cash flows other than expenditure on equipment arise at the end of the year.

1. Is the investment worth taking? How sensitive is this decision to the unit price, number of units sold per year and the cost of steel.
2. Suggest four other investment appraisal methods for such a project.
3. Could the company benefit from delaying the investment in this project? Using game theory and option pricing theory, suggest why delaying the investment could be beneficial (optional).

Answer rating: 100% (QA)

Is the investment worth taking Yes the investment is worth taking The Net Present Value NPV of the project is 1097391 This is calculated using the dis... View the full answer