Babz plc is considering a project to produce a new product line of fabric treated with...

 

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Babz plc is considering a project to produce a new product line of fabric treated with silver ions which has been shown to reduce odour associated with bacteria in the fabric. The manufacturing process is significantly different to Fabric's more traditional fabrics and so will require investment in new equipment. Because this is new technology, the expected life of the project is only three years. The following information and estimates have been collated Initial investment (new equipment) Disposal value at the end of 3 years Demand in metres of fabric per year Selling price per metre Variable cost per metre Fixed production overheads per year £212,000 £20,000 7,500 £70 Estimated specific inflation rates 2% £35 6% £95,000 5% • The tax rate is 30% paid one year in arrears. Capital allowances on equipment are claimed on a straight line basis over the life of the project. • Fabric's CFO uses the real weighted average cost of capital as the discount rate. This is 8.57% and the general rate of inflation is 5%. Provide Babz plc with a Net Present Value (NPV) analysis of the project and make a recommendation. The analysis should be in good form and show workings. Round to the nearest whole pound and percentage. Use discount factors to four decimal places. Babz plc is considering a project to produce a new product line of fabric treated with silver ions which has been shown to reduce odour associated with bacteria in the fabric. The manufacturing process is significantly different to Fabric's more traditional fabrics and so will require investment in new equipment. Because this is new technology, the expected life of the project is only three years. The following information and estimates have been collated Initial investment (new equipment) Disposal value at the end of 3 years Demand in metres of fabric per year Selling price per metre Variable cost per metre Fixed production overheads per year £212,000 £20,000 7,500 £70 Estimated specific inflation rates 2% £35 6% £95,000 5% • The tax rate is 30% paid one year in arrears. Capital allowances on equipment are claimed on a straight line basis over the life of the project. • Fabric's CFO uses the real weighted average cost of capital as the discount rate. This is 8.57% and the general rate of inflation is 5%. Provide Babz plc with a Net Present Value (NPV) analysis of the project and make a recommendation. The analysis should be in good form and show workings. Round to the nearest whole pound and percentage. Use discount factors to four decimal places.

Answer rating: 100% (QA)

Solution NPV means PV of net benefits ... View the full answer