Breccon Co introduced a new product, DV, to its range last year. The machine used to...
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Breccon Co introduced a new product, DV, to its range last year. The machine used to mould each item is a bottleneck in the productionprocess meaning that a maximum of 5,000 units per annum can bemanufactured. The DV product has been a huge success in the marketplace and as aresult, all items manufactured are sold. The marketing department hasprepared the following demand forecast for future years as a result offeedback from customers. Year Demand (units) 1 2 7,000 9,000 Initial investment Maximum additional output Current selling price Variable operating costs Fixed operating costs 3 11,000 The directors are now considering investing in a second machinethat will allow the company to satisfy the excess demand. The followinginformation relating to this investment proposal has now been prepared: 4 4,000 $20,000 5,000 units $50 per unit $28 per unit $15,000 per year If production remained at 5,000 units, the current selling pricewould be expected to continue throughout the remainder of the life ofthe product. However, if production is increased, it is expected thatthe selling price will fall to $45 per unit for all units sold. Again,this will last for the remainder of the life of the product. Required: (a) Calculate the following values for the investment proposal: (i) net present value; (ii) internal rate of return; (iii) return on capital employed (accounting rate of return) based on initial investment; and. (iv) discounted payback period Breccon Co introduced a new product, DV, to its range last year. The machine used to mould each item is a bottleneck in the productionprocess meaning that a maximum of 5,000 units per annum can bemanufactured. The DV product has been a huge success in the marketplace and as aresult, all items manufactured are sold. The marketing department hasprepared the following demand forecast for future years as a result offeedback from customers. Year Demand (units) 1 2 7,000 9,000 Initial investment Maximum additional output Current selling price Variable operating costs Fixed operating costs 3 11,000 The directors are now considering investing in a second machinethat will allow the company to satisfy the excess demand. The followinginformation relating to this investment proposal has now been prepared: 4 4,000 $20,000 5,000 units $50 per unit $28 per unit $15,000 per year If production remained at 5,000 units, the current selling pricewould be expected to continue throughout the remainder of the life ofthe product. However, if production is increased, it is expected thatthe selling price will fall to $45 per unit for all units sold. Again,this will last for the remainder of the life of the product. Required: (a) Calculate the following values for the investment proposal: (i) net present value; (ii) internal rate of return; (iii) return on capital employed (accounting rate of return) based on initial investment; and. (iv) discounted payback period
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Calculation Free Cashflow Unit Produce Extra Units Produce over 5000 ConributionUni... View the full answer
Related Book For
Fundamental financial accounting concepts
ISBN: 978-0078025365
8th edition
Authors: Thomas P. Edmonds, Frances M. Mcnair, Philip R. Olds, Edward
Posted Date:
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