BEN Electronics is considering buying a new machine and using it to produce a new type...
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BEN Electronics is considering buying a new machine and using it to produce a new type of silicon chip that the company's engineers have designed. The financial estimates supplied by the firm's technical and marketing staff are as follows. One number is given for figures that are certain. Where there is risk, the analysts have been asked for an expected value and a feasible range of values. The probability that the final outcome will be below the lower limit, or that it will be above the higher limit is 5%. The new machine will cost £600,000 (certain), and it has a design capacity of one million chips a year. The proportion of these chips that will be of saleable quality is estimated at 80% (range 68% to 92%). The fixed costs of operation will be £100,000 per year (certain) and the variable costs per unit sold will be 10p per chip (certain). Initially chips will be sold at what the market will bear. This is expected to be 50p (range 45p to 55p). However, competitors will have learned how to make the chips at the end of the 4th year (range 3 yrs to 5 yrs) and when this happens the price will fall to 30p. BEN's cost of capital for this project is 15% p.a. The machine, and the chips it produces, will become obsolete after 8 years of production. (i) (ii) (iii) NB Calculate the expected value for the NPV. Perform a sensitivity analysis on this project. Which type of risk (% of saleable chips, number of years before competitive entry and initial price) has the biggest influence on the net present value of the project? How might the business use this information? The variable costs are only incurred on chips that are of saleable quality. (i) (ii) (iii) (iv) Calculate the NPV and IRR of the following three investment projects. The required rate of return is 12% p.a. (Brackets indicate a negative figure). Time 0 1 2 3 4 5 Incremental cash flow (£s) B (10,000) 3,000 A (20,000) 13,333 13,333 13,333 12,000 (33,333) 3,500 4,000 4,000 4,000 C (20,000) 5,000 7,000 7,500 7,500 7,500 Which project(s) should be accepted if the company is free to accept any or all? Which projects should be accepted if B and C are mutually exclusive? A further project D is available which has exactly the same cash flows as B. If the company has an absolute limit of £20,000 available for investment at time 0, which projects should it accept? BEN Electronics is considering buying a new machine and using it to produce a new type of silicon chip that the company's engineers have designed. The financial estimates supplied by the firm's technical and marketing staff are as follows. One number is given for figures that are certain. Where there is risk, the analysts have been asked for an expected value and a feasible range of values. The probability that the final outcome will be below the lower limit, or that it will be above the higher limit is 5%. The new machine will cost £600,000 (certain), and it has a design capacity of one million chips a year. The proportion of these chips that will be of saleable quality is estimated at 80% (range 68% to 92%). The fixed costs of operation will be £100,000 per year (certain) and the variable costs per unit sold will be 10p per chip (certain). Initially chips will be sold at what the market will bear. This is expected to be 50p (range 45p to 55p). However, competitors will have learned how to make the chips at the end of the 4th year (range 3 yrs to 5 yrs) and when this happens the price will fall to 30p. BEN's cost of capital for this project is 15% p.a. The machine, and the chips it produces, will become obsolete after 8 years of production. (i) (ii) (iii) NB Calculate the expected value for the NPV. Perform a sensitivity analysis on this project. Which type of risk (% of saleable chips, number of years before competitive entry and initial price) has the biggest influence on the net present value of the project? How might the business use this information? The variable costs are only incurred on chips that are of saleable quality. (i) (ii) (iii) (iv) Calculate the NPV and IRR of the following three investment projects. The required rate of return is 12% p.a. (Brackets indicate a negative figure). Time 0 1 2 3 4 5 Incremental cash flow (£s) B (10,000) 3,000 A (20,000) 13,333 13,333 13,333 12,000 (33,333) 3,500 4,000 4,000 4,000 C (20,000) 5,000 7,000 7,500 7,500 7,500 Which project(s) should be accepted if the company is free to accept any or all? Which projects should be accepted if B and C are mutually exclusive? A further project D is available which has exactly the same cash flows as B. If the company has an absolute limit of £20,000 available for investment at time 0, which projects should it accept?
Expert Answer:
Answer rating: 100% (QA)
Calculate the expected value for the NPV The expected value for the NPV is 112500 The expected value for the NPV is calculated as follows NPV 600000 1000000 08 50 100000 10 1000000 08 600000 1000000 0... View the full answer
Related Book For
Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Posted Date:
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