Crassula PLC has experienced exponential growth in demand for its products that means that it has...

 

 

Transcribed Image Text:

Crassula PLC has experienced exponential growth in demand for its products that means that it has outgrown its current operational facility and is considering investing in upgraded machinery. The following capital expenditure plans are for the next 6 years. The company has a weighted average cost of capital of 8%. Machine 1: Bespoke Build Design costs Build costs** Installation costs Delivery costs of machine Staff training and health and safety costs to operate the new machine* Incremental contribution increased capacity per annum Incremental overheads per annum Increased working capital requirement Depreciation per annum Anticipated resale value in 6 years Energy efficiency rating Machine 2. Adaptation of an existing off the shelf machine Adaptation costs Price of machine*** Installation costs Delivery costs of machine Staff training and health and safety costs to operate the new machine* Incremental contribution increased capacity per annum Incremental overheads per annum Increased working capital requirement Depreciation per annum Anticipated resale value in 6 years Energy Efficiency rating £14,000 £150,000 £6,200 £1,200 £3,000 £161,200 £98,000 £82,000 £20,000 £51,400 AA £7,000 £100,000 £3,100 £1,000 £1,000 £142,000 £91,000 £62,000 £13,333 £30,200 AAA The staff training and health and safety costs are a one off cost required before the machines are operational. ** The bespoke machine figures for build and installation are estimates provided by the contractors but are subject to potential cost increases. ***The price of the off the shelf machine is guaranteed for 6 months. Due to government growth strategies for industry Crassula PLC will pay no corporation tax on profits for the next 10 years. Required (show your workings for each answer): [14 marks] Write a report for Crassula PLC, clearly advising which proposal should be undertaken. Indicate any reservations regarding the methods used in your evaluation and discuss other strategic factors that Crassula PLC should consider. [10 marks] Explain why the NPV is considered the most theoretically superior of the four capex appraisal techniques used to evaluate this investment. Crassula PLC has experienced exponential growth in demand for its products that means that it has outgrown its current operational facility and is considering investing in upgraded machinery. The following capital expenditure plans are for the next 6 years. The company has a weighted average cost of capital of 8%. Machine 1: Bespoke Build Design costs Build costs** Installation costs Delivery costs of machine Staff training and health and safety costs to operate the new machine* Incremental contribution increased capacity per annum Incremental overheads per annum Increased working capital requirement Depreciation per annum Anticipated resale value in 6 years Energy efficiency rating Machine 2. Adaptation of an existing off the shelf machine Adaptation costs Price of machine*** Installation costs Delivery costs of machine Staff training and health and safety costs to operate the new machine* Incremental contribution increased capacity per annum Incremental overheads per annum Increased working capital requirement Depreciation per annum Anticipated resale value in 6 years Energy Efficiency rating £14,000 £150,000 £6,200 £1,200 £3,000 £161,200 £98,000 £82,000 £20,000 £51,400 AA £7,000 £100,000 £3,100 £1,000 £1,000 £142,000 £91,000 £62,000 £13,333 £30,200 AAA The staff training and health and safety costs are a one off cost required before the machines are operational. ** The bespoke machine figures for build and installation are estimates provided by the contractors but are subject to potential cost increases. ***The price of the off the shelf machine is guaranteed for 6 months. Due to government growth strategies for industry Crassula PLC will pay no corporation tax on profits for the next 10 years. Required (show your workings for each answer): [14 marks] Write a report for Crassula PLC, clearly advising which proposal should be undertaken. Indicate any reservations regarding the methods used in your evaluation and discuss other strategic factors that Crassula PLC should consider. [10 marks] Explain why the NPV is considered the most theoretically superior of the four capex appraisal techniques used to evaluate this investment.

Answer rating: 100% (QA)

In order to advise Crassula PLC on which proposal to undertake we need to calculate the Net Present Value NPV for each machine and then compare these values The NPV is calculated by finding the presen... View the full answer