Demand this year is strong for the product and Mercury Go's travel bag production line is...

 

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Demand this year is strong for the product and Mercury Go's travel bag production line is operating at its capacity of 10 million travel bags per year, which are sold all round the world. Sales could reach 11 million next year if Mercury Go had the productive capacity. An analysis carried out by the marketing team at the company has predicted unit sales figures of 11m, 12.5m, 14m, 15m and 15.5m over the next five years if Mercury Go spent an extra £1,500,000 per annum on advertising and marketing in each of the first three years and £1m per year for the final years. To achieve this would need an investment in extra productive capacity. The new equipment would cost 750,000, and there would be L60,000 of capitalised installation costs and L30,000 of expenstd installation costs. The cquipment would be depreciated straight line to zero over four years. The life of the cquipment could be extended to five years if Mercury Go overhauled the equipment at the end of year 4. The overhaul would be expected to cost £170,000 and this cost would be expensed at the time it was carried out. The company has apportioned L80,000 of overheads to the project. The salvage value of the equipment at the end of five years is expected to be £50,000. The wholesale price of the travel bags is (4.80 cach and there are variable costs of 2.95 per case. Extra investment in working capital would be nceded at the start of the expansion project. This would amount to (175,000 and working capital would be maintained at the (175,000 level through until the end of the project. There arc also interest payments of (85,500 per year through the life of the project and equipment removal costs at the end of the project of (25,000. (b) Lay out the relevant cash flows for the project and calculate the NPV. What should the company do? WACC given As 12.99% (10 marks) Demand this year is strong for the product and Mercury Go's travel bag production line is operating at its capacity of 10 million travel bags per year, which are sold all round the world. Sales could reach 11 million next year if Mercury Go had the productive capacity. An analysis carried out by the marketing team at the company has predicted unit sales figures of 11m, 12.5m, 14m, 15m and 15.5m over the next five years if Mercury Go spent an extra £1,500,000 per annum on advertising and marketing in each of the first three years and £1m per year for the final years. To achieve this would need an investment in extra productive capacity. The new equipment would cost 750,000, and there would be L60,000 of capitalised installation costs and L30,000 of expenstd installation costs. The cquipment would be depreciated straight line to zero over four years. The life of the cquipment could be extended to five years if Mercury Go overhauled the equipment at the end of year 4. The overhaul would be expected to cost £170,000 and this cost would be expensed at the time it was carried out. The company has apportioned L80,000 of overheads to the project. The salvage value of the equipment at the end of five years is expected to be £50,000. The wholesale price of the travel bags is (4.80 cach and there are variable costs of 2.95 per case. Extra investment in working capital would be nceded at the start of the expansion project. This would amount to (175,000 and working capital would be maintained at the (175,000 level through until the end of the project. There arc also interest payments of (85,500 per year through the life of the project and equipment removal costs at the end of the project of (25,000. (b) Lay out the relevant cash flows for the project and calculate the NPV. What should the company do? WACC given As 12.99% (10 marks)

Answer rating: 100% (QA)

Calculation of Cash flows and NPV of project Particulars Year0 Year1 Year2 year3 Year4 Year5 Sales u... View the full answer