The managing director of Tigwood Ltd believes that a market exists for 'microbooks'. He has proposed...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The managing director of Tigwood Ltd believes that a market exists for 'microbooks'. He has proposed that the company should market 100 best-selling books on microfiche, which can be read using a special microfiche reader that is connected to a television screen. A microfiche containing an entire book can be purchased from a photo-graphic company at 40 per cent of the average production cost of best-selling paperback books. The average cost of producing paperback books is estimated at £1.50, and the average selling price of paper-backs is £3.95 each. Copyright fees of 20 per cent of the average selling price of the paperback books would be payable to the publishers of the paperbacks plus an initial lump sum that is still being negotiated but is expected to be £1.5 million. No tax allowances are available on this lump-sum payment. An agreement with the publisherswould be signed for a period of six years. Additional variable costs of staffing, handling and marketing are 20p per microfiche, and fixed costs are negligibleTigwood Ltd has spent £100,000 on market research and expects sales to be 1,500,000 units per year at an initial unit price of £2.The microfiche reader would be produced and marketed by another company. Tigwood would finance the venture with a bank loan at an interest rate of 16 per cent per year. The company's money (nominal) cost of equity and real cost of equity are estimated to be 23 per cent p.a. and 12.6 per cent p.a., respectively. Tigwood's money weighted average cost of capital and real weighted average cost of capital are 18 per cent p.a. and 8 per cent p.a., respectively. The risk-free rate of interest is 11 per cent p.a. and the market return is 17 per cent p.a. Corporation Tax is at the rate of 35 per cent, payable in the year the profit occurs. All cash flows may be assumed to be at the year end, unless otherwise stated. Required (a) Calculate the expected net present value of the microbooks project. (b) Explain the reasons for your choice of discount rate in the answer to part (a). Discuss whether this rate is likely to be the most appropriate to use in the analysis of the proposed project. (c) (i) Using sensitivity analysis, estimate by what percentage each of the following would have to change be-fore the project was no longer expected to be viable: initial outlay; annual contribution; the life of the agreement; the discount rate. (ii) What are the limitations of this sensitivity analysis? (d) What further information would be useful to help the company decide whether to undertake the microbook project? The managing director of Tigwood Ltd believes that a market exists for 'microbooks'. He has proposed that the company should market 100 best-selling books on microfiche, which can be read using a special microfiche reader that is connected to a television screen. A microfiche containing an entire book can be purchased from a photo-graphic company at 40 per cent of the average production cost of best-selling paperback books. The average cost of producing paperback books is estimated at £1.50, and the average selling price of paper-backs is £3.95 each. Copyright fees of 20 per cent of the average selling price of the paperback books would be payable to the publishers of the paperbacks plus an initial lump sum that is still being negotiated but is expected to be £1.5 million. No tax allowances are available on this lump-sum payment. An agreement with the publisherswould be signed for a period of six years. Additional variable costs of staffing, handling and marketing are 20p per microfiche, and fixed costs are negligibleTigwood Ltd has spent £100,000 on market research and expects sales to be 1,500,000 units per year at an initial unit price of £2.The microfiche reader would be produced and marketed by another company. Tigwood would finance the venture with a bank loan at an interest rate of 16 per cent per year. The company's money (nominal) cost of equity and real cost of equity are estimated to be 23 per cent p.a. and 12.6 per cent p.a., respectively. Tigwood's money weighted average cost of capital and real weighted average cost of capital are 18 per cent p.a. and 8 per cent p.a., respectively. The risk-free rate of interest is 11 per cent p.a. and the market return is 17 per cent p.a. Corporation Tax is at the rate of 35 per cent, payable in the year the profit occurs. All cash flows may be assumed to be at the year end, unless otherwise stated. Required (a) Calculate the expected net present value of the microbooks project. (b) Explain the reasons for your choice of discount rate in the answer to part (a). Discuss whether this rate is likely to be the most appropriate to use in the analysis of the proposed project. (c) (i) Using sensitivity analysis, estimate by what percentage each of the following would have to change be-fore the project was no longer expected to be viable: initial outlay; annual contribution; the life of the agreement; the discount rate. (ii) What are the limitations of this sensitivity analysis? (d) What further information would be useful to help the company decide whether to undertake the microbook project?
Expert Answer:
Answer rating: 100% (QA)
a Micro books project analysis Solutions Life of project 6 years Market research is considered a sunk cost The cost of finance is accounted for in the discount rate Variable costs per unit Copyright 3... View the full answer
Related Book For
Posted Date:
Students also viewed these general management questions
-
A process involves moving speed, load weight, and rate of loading in a conveyor system. The variables are provided as high (1) and low (0) levels for digital control. An alarm should be initiated...
-
The managing director of your company believes that the existing annual budget system is costly to operate and produces unsatisfactory results due to: long preparation period; business decisions...
-
Each year near 30 June, when the managing director of Bargon Construction Ltd takes a three-week holiday to the Barrier Reef, she signs several cheques to pay major bills during the period she is...
-
A solid conducting cylinder of radius 0.1 m and mass of 4 kg rests on horizontal conducting rails (Figure). The rails, separated by a distance a?= 0.4 m, have a rough surface so the cylinder rolls...
-
StayN Shape was started by Jennifer Long several years ago to provide physical fitness services to its customers. The following balances were extracted from the companys general ledger as at the...
-
What is a capitalized cost reduction? What role does it play in determining the adjusted capitalized cost?
-
For each of the following sets of numbers, calculate a \(95 \%\) confidence interval for the mean ( \(\sigma\) known); before going through the steps in calculating the confidence interval, the...
-
1. The accounts estimated revenues and appropriations appear in the trial balance of the general fund. These accounts indicate: a. The use of cash basis accounting b. The use of accrual basis...
-
Assume the carrying capacity of the earth is 9 billion. Use the 1960s peak annual growth rate of 2.1% and population of 3 billion to predict the base growth rate and current growth rate with a...
-
On January 1, 2010, Porter Company purchased an 80% interest in the capital stock of Salem Company for $850,000. At that time, Salem Company had capital stock of $550,000 an retained earnings of...
-
In a photo-emissive cell, with exciting wavelength 2, the fastest electron has speed v. If the exciting wavelength is changed to, the speed of the fastest emitted electron will be (a) (3/4)2. v (b)...
-
Five years ago, Linda Monroe became the sole owner of LM Electronics. LM Electronics sells home entertainment centres, car audio equipment and computers. LM advertises that it sells only the best...
-
Explain the double entry rule. How (if at all) does this rule change in the case of a compound entry?
-
What is a debit entry? What is a credit entry?
-
On the cash budget, why is the beginning cash balance for July the same as the beginning cash balance for the first quarter of the year? Why is the September ending cash balance the same as the first...
-
Define an account. What are the parts of a T-account?
-
Sometimes clients in certain circumstances have unreasonable expectations and have trouble letting these expectations go. What helps in these situations? What can you can be done to manage the...
-
Find a polar equation for the curve represented by the given Cartesian equation. 4y 2 = x
-
You have been appointed as chief management accountant of a well-established company with a brief to improve the quality of information supplied for management decision-making. As a first task you...
-
It has been stated that companies do not have profitable products, only profitable customers. Many companies have placed emphasis on the concept of customer account profitability (CAP) analysis in...
-
'A break-even chart must be interpreted in the light of the limitations of its underlying assumptions ...' (From Cost Accounting: A Managerial Emphasis, by C.T. Horngren.) Required: (a) For any three...
-
Your boss gives you a sample of "gunk" and asks you to measure its viscosity. You do this in a cup and bob viscometer that has an outer (cup) diameter of 2 in., an inner (bob) diameter of $1.75...
-
The following data were obtained for a proprietary salad dressing tested at $22^{\circ} \mathrm{C}$ in a cup and bob viscometer (cup diameter $=4.2 \mathrm{~cm}$, bob diameter $=4.01 \mathrm{~cm}$,...
-
An inclined tube manometer with a reservoir is used to measure the pressure gradient in a large pipe carrying oil $(\mathrm{SG}=0.91)$ (see Figure $\mathrm{P} 4.5)$. The pipe is inclined at an angle...
Study smarter with the SolutionInn App