Anfield plc has just developed a new mechanical toy - the Torres. The development costs totalled...
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Anfield plc has just developed a new mechanical toy - the Torres. The development costs totalled £300,000. To assess the commercial viability of the Torres, a market survey has been undertaken at a cost of £35,000. The survey suggests that the Torres will have a market life of four years and can be sold by Anfield plc for £20 per Torres. Demand for the Torres for each of the four years has been estimated as follows: Number of Torres Probability of occurrence 11,000 0.3 14,000 0.6 16,000 0.1 If the decision is made to go ahead with the Torres, production and sales will begin immediately. Production will require the use of machinery that the business already owns, having bought it for £200,000 three years ago. If Torres production does not go ahead, the machinery will be sold for £85,000, there being no other use for it. If it is used in Torres production, the machinery will be sold for an estimated £35,000 at the end of the fourth year. Each Torres will take one hour's labour of employees who will be taken on specifically for the work at a rate of £8.00 per hour. The business will incur an estimated £10,000 in redundancy costs relating to these employees at the end of the four years. Materials will cost an estimated £6.00 per Torres. The production of the Torres will give rise to an additional fixed cost of £15,000 per year. It is believed that if Anfield pic decides not to go ahead with producing the Torres, the rights to the product could be sold to another business for £125,000, receivable immediately. Anfield plc has a cost of capital of 12% per year. Required: a) On the basis of the expected net present value (ENPV), should the business go ahead with production and sales of the Torres? b) Assess the ENPV approach to investment decision, with reference to the Torres decision in (a). Anfield plc has just developed a new mechanical toy - the Torres. The development costs totalled £300,000. To assess the commercial viability of the Torres, a market survey has been undertaken at a cost of £35,000. The survey suggests that the Torres will have a market life of four years and can be sold by Anfield plc for £20 per Torres. Demand for the Torres for each of the four years has been estimated as follows: Number of Torres Probability of occurrence 11,000 0.3 14,000 0.6 16,000 0.1 If the decision is made to go ahead with the Torres, production and sales will begin immediately. Production will require the use of machinery that the business already owns, having bought it for £200,000 three years ago. If Torres production does not go ahead, the machinery will be sold for £85,000, there being no other use for it. If it is used in Torres production, the machinery will be sold for an estimated £35,000 at the end of the fourth year. Each Torres will take one hour's labour of employees who will be taken on specifically for the work at a rate of £8.00 per hour. The business will incur an estimated £10,000 in redundancy costs relating to these employees at the end of the four years. Materials will cost an estimated £6.00 per Torres. The production of the Torres will give rise to an additional fixed cost of £15,000 per year. It is believed that if Anfield pic decides not to go ahead with producing the Torres, the rights to the product could be sold to another business for £125,000, receivable immediately. Anfield plc has a cost of capital of 12% per year. Required: a) On the basis of the expected net present value (ENPV), should the business go ahead with production and sales of the Torres? b) Assess the ENPV approach to investment decision, with reference to the Torres decision in (a).
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a Expected Unit of Production Probability Expected Torres 3300 Number of Torres 11000 03 14000 06 ... View the full answer
Related Book For
Quantitative Analysis for Management
ISBN: 978-0132149112
11th Edition
Authors: Barry render, Ralph m. stair, Michael e. Hanna
Posted Date:
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