A Firm produces consumer goods and it is planning to make a new investment in new production

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Question:

A Firm produces consumer goods and it is planning to make a new investment in new production lines.

The Firm is planning to introduce a new product.

There are two different projects:

1) The first project is to invest in a new production line so as to introduce product A.

2) The second project is to invest in a new production line so as to introduce product B.

Cash required for new investments is available by its own funding. There is no extra interest cost between the two projects.

Cost of Capital for the Firm:	15%
The following information is provided:
Selling Price of Product A:	105 €
Selling Price of Product B:	75 €
Sales Units of Product A:	6.000	Units
Sales Units of Product B:	10.000	Units

Units of Material C for Product A:	4	Units
Units of Material C for Product B:	3	Units
Units of Material D for Product A:	5	Units
Units of Material D for Product B:	6	Units
Cost of Material C:	2 €
Cost of Material D:	3 €

Assembly Working Hours for Product A:	5	Hours
Packaging Working Hours for Product A:	3	Hours
Assembly Working Hours for Product B:	4	Hours
Packaging Working Hours for Product B:	2	Hours
Assembly Cost per Hour:	2 €
Packaging Cost per Hour:	3 €

Fixed Overheads:

Administration Department:	45.000 €
Human Resources Department:	32.000 €
Finance & Accounting Department:	26.000 €
Security Department:	17.000 €
Information Technology Department:	20.000 €
Law Department:	15.000 €

Variable Overheads:

Sales Department:	6 €
Marketing Department:	8 €
Logistic & Supply Chain Department:	6 €
Procurement Department:	2 €
Maintenance Department:	4 €
Other Operating Expenses:	3 €

Initial Investment for Product A:	100.000 €
Initial Investment for Product B:	200.000 €

The residual value of the new machinery for the production of product A after 10 years is:	5.000 €
The residual value of the new machinery for the production of product B after 10 years is:	10.000 €

Based on the previous data provided please advise the Firm so as to proceed to the most profitable project. You need to support the Firm for its decision-making and provide supporting documents.

Make your own assumptions if it is required.

Explain and present the pros and cons of your methodology.

1. Provide and present analytically your calculations. (80%)

2. Present your comments and analysis supporting the Firm for its decision-making as a financial management consultant.