Parkinson Plc is considering a major investment project in a new product, the Legend. Market research...

 

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Parkinson Plc is considering a major investment project in a new product, the Legend. Market research indicates that the demand for the Legend at a unit selling price of £12.00 and advertising costs over the next four years, are as follows: Demand (units) Year 1 2 3 4 20,000 15,000 10,000 8,000 Advertising Costs (£) 20,000 10,000 8,000 Nil The demand for the Legend after year 4 is expected to be too few to continue marketing it. The variable cost per Legend is expected to be £6.00. The project requires a new machine to be purchased for £205,000. The machine will be depreciated using the straight-line method over 4 years. There is no scrap value at the end of its useful life. The board of directors' judge that the figures shown above are an accurate estimation for each of the years. They also believe that the appropriate discount rate to use for this project is 10% per annum. The discount factors for a cost of capital at 10% and 20% are as follows Year 0 1 2 3 4 10% 1.000 0.909 0.826 0.751 0.683 20% 1.000 0.833 0.694 0.589 0.482 Required: a) Estimate the cash flows for the 4 years of the project life. b) Calculate the (non-discounted) Payback Period c) Using the initial investment, calculate the Accounting Rate of Return (ARR). [4 Marks]. [4 marks] [7 marks] d) Using the discount factors detailed above, calculate the Net Present Value (NPV) at 10%. [7 marks] e) Using the discount factors detailed above, calculate the Internal Rate of Return (IRR). [7 marks] Parkinson Plc is considering a major investment project in a new product, the Legend. Market research indicates that the demand for the Legend at a unit selling price of £12.00 and advertising costs over the next four years, are as follows: Demand (units) Year 1 2 3 4 20,000 15,000 10,000 8,000 Advertising Costs (£) 20,000 10,000 8,000 Nil The demand for the Legend after year 4 is expected to be too few to continue marketing it. The variable cost per Legend is expected to be £6.00. The project requires a new machine to be purchased for £205,000. The machine will be depreciated using the straight-line method over 4 years. There is no scrap value at the end of its useful life. The board of directors' judge that the figures shown above are an accurate estimation for each of the years. They also believe that the appropriate discount rate to use for this project is 10% per annum. The discount factors for a cost of capital at 10% and 20% are as follows Year 0 1 2 3 4 10% 1.000 0.909 0.826 0.751 0.683 20% 1.000 0.833 0.694 0.589 0.482 Required: a) Estimate the cash flows for the 4 years of the project life. b) Calculate the (non-discounted) Payback Period c) Using the initial investment, calculate the Accounting Rate of Return (ARR). [4 Marks]. [4 marks] [7 marks] d) Using the discount factors detailed above, calculate the Net Present Value (NPV) at 10%. [7 marks] e) Using the discount factors detailed above, calculate the Internal Rate of Return (IRR). [7 marks]

Answer rating: 100% (QA)

Here are the stepbystep calculations a Calculate the cash flows for each year Year 1 Revenue 20000 u... View the full answer