Belinda Company Limited is evaluating an investment proposal to manufacture product DD3 which requires an investment...

 

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Belinda Company Limited is evaluating an investment proposal to manufacture product DD3 which requires an investment in new machinery. It has performed well in test marketing trials conducted recently by the company's R&D department which costs the company GHC500,000 and was accounted as part of initial investment. The Management Accountant has prepared the following information relating to the investment proposal Initial investment in machinery Selling price(current price terms) Variable operating costs(current price terms Fixed operating costs (current price terms) GHC9 million GHC40 per unit GHC16 per unit GHC340,000 per year The R&D department has prepared the following demand forecast as a result of its test marketing trials. The forecast reflects expected technological change and its effect on the anticipated life cycles of product DD3. Year 2 Demand(units) 120,000 140,000 It is expected that all units of product DD3 produced will be sold, in line with the company's policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is expected at the end of four years, when production of productDD3 is planned to end. The 51 Page 3 240,000 90,000 machine attracts 25% depreciation Farmers Alliance uses a nominal (money) discount rate of 15% per year and a target return on capital employed of 25% per year. Corporation tax is 25% and paid in the same year as related profit. The target payback and discounted payback periods are 3 and 5 years respectively for the company. (ii) Internal rate of retur (iii) Payback and Discounted payback period (a) Identify and briefly explain the key stages in the capital investment decision making process, and the role of investment appraisal in this process. (b) Evaluate the proposal using the following techniques: (1) Net present value Belinda Company Limited is evaluating an investment proposal to manufacture product DD3 which requires an investment in new machinery. It has performed well in test marketing trials conducted recently by the company's R&D department which costs the company GHC500,000 and was accounted as part of initial investment. The Management Accountant has prepared the following information relating to the investment proposal Initial investment in machinery Selling price(current price terms) Variable operating costs(current price terms Fixed operating costs (current price terms) GHC9 million GHC40 per unit GHC16 per unit GHC340,000 per year The R&D department has prepared the following demand forecast as a result of its test marketing trials. The forecast reflects expected technological change and its effect on the anticipated life cycles of product DD3. Year 2 Demand(units) 120,000 140,000 It is expected that all units of product DD3 produced will be sold, in line with the company's policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is expected at the end of four years, when production of productDD3 is planned to end. The 51 Page 3 240,000 90,000 machine attracts 25% depreciation Farmers Alliance uses a nominal (money) discount rate of 15% per year and a target return on capital employed of 25% per year. Corporation tax is 25% and paid in the same year as related profit. The target payback and discounted payback periods are 3 and 5 years respectively for the company. (ii) Internal rate of retur (iii) Payback and Discounted payback period (a) Identify and briefly explain the key stages in the capital investment decision making process, and the role of investment appraisal in this process. (b) Evaluate the proposal using the following techniques: (1) Net present value

Answer rating: 100% (QA)

1 Following steps are generally involved in capital investment decisions 1 To identify investment opportunities 2gathering of investment proposals 3de... View the full answer