PH Ltd is an engineering company that is considering a project to produce a tracking device...

  

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PH Ltd is an engineering company that is considering a project to produce a tracking device for vehicles to be sold in the entire SADC region. It is the first of its kind with the prospects of making any other gadget of the similar nature on the market to be obsolete. The company has already down the market research over the device and are now considering whether or not to produce the device. The Board of Directors will soon meet to make a final decision and has the following information available to help it decide: 6) The cost of developing the device has been K1,750,000 to date and the company is committed to spending a further K400,000 within the next two months. (i) The company has spare production capacity and can produce the device using machinery that will cost K470,000 and which will be purchased immediately. It is expected to be sold at the end of four years for K80,000. () Total fixed costs identified with the production of the device are K172,500 per year. This includes a depreciation charge in respect of the machinery of K97,500 per year and a charge allocated to represent a fair share of the fixed costs of the business as a whole of K25,000 per year. (iv) The devices are expected to sell for K1,500 each and the marketing department believes that the business can sell 800 devices per year over the next four years. (v) The variable costs of production are K700 per device. The company has a cost of capital of 12%. Ignore inflation and taxation Required: a) Identify the relevant cash flows and give reasons for excluding certain figures. b) Caleulate the net present value of producing and selling the new camera. c) Calculate the IRR and ARR for the project PH Ltd is an engineering company that is considering a project to produce a tracking device for vehicles to be sold in the entire SADC region. It is the first of its kind with the prospects of making any other gadget of the similar nature on the market to be obsolete. The company has already down the market research over the device and are now considering whether or not to produce the device. The Board of Directors will soon meet to make a final decision and has the following information available to help it decide: 6) The cost of developing the device has been K1,750,000 to date and the company is committed to spending a further K400,000 within the next two months. (i) The company has spare production capacity and can produce the device using machinery that will cost K470,000 and which will be purchased immediately. It is expected to be sold at the end of four years for K80,000. () Total fixed costs identified with the production of the device are K172,500 per year. This includes a depreciation charge in respect of the machinery of K97,500 per year and a charge allocated to represent a fair share of the fixed costs of the business as a whole of K25,000 per year. (iv) The devices are expected to sell for K1,500 each and the marketing department believes that the business can sell 800 devices per year over the next four years. (v) The variable costs of production are K700 per device. The company has a cost of capital of 12%. Ignore inflation and taxation Required: a) Identify the relevant cash flows and give reasons for excluding certain figures. b) Caleulate the net present value of producing and selling the new camera. c) Calculate the IRR and ARR for the project

Answer rating: 100% (QA)

Any sunk costs associated with a project should not be taken into account when calculating its net p... View the full answer