Halyard plc is studying the viability of a proposed new division which is due to commence...

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Halyard plc is studying the viability of a proposed new division which is due to commence operations on 1 July 2019. This new project will require capital investment (new plant and machinery) of €600,000 and working capital investment of €300,000 (stock €200,000 and cash float €100,000). The plant and machinery will be depreciated at a rate €100,000 per annum over the 5 year expected live of the project and will then be sold for €100,000. Sales of €800,000 p.a. and purchases of stock of €300,000 p.a. both on three months credit are expected throughout the life of the project. Labour costs of €200,000 p.a. and overhead costs of €100,000 p.a. are anticipated. In January 2019, Halyard plc employed Analytics plc to carry out market research in relation to the project. The work is now complete and an invoice for €350,000 has been received. This invoice will be paid in December 2019. The Halyard plc head office will allocate head office costs of €200,000 per annum to the new project as part of its accounting process. However additional head office costs directly attributable to the new project are expected to be €80,000 per annum. The opening of the new division is expected to yield benefits to other divisions within Halyard plc. This benefit has been valued at €50,000 per annum. The company's cost of capital is 10%. Required: Assess the viability of the proposed new division using a discounted cash flow project appraisal technique and advise management. Halyard plc is studying the viability of a proposed new division which is due to commence operations on 1 July 2019. This new project will require capital investment (new plant and machinery) of €600,000 and working capital investment of €300,000 (stock €200,000 and cash float €100,000). The plant and machinery will be depreciated at a rate €100,000 per annum over the 5 year expected live of the project and will then be sold for €100,000. Sales of €800,000 p.a. and purchases of stock of €300,000 p.a. both on three months credit are expected throughout the life of the project. Labour costs of €200,000 p.a. and overhead costs of €100,000 p.a. are anticipated. In January 2019, Halyard plc employed Analytics plc to carry out market research in relation to the project. The work is now complete and an invoice for €350,000 has been received. This invoice will be paid in December 2019. The Halyard plc head office will allocate head office costs of €200,000 per annum to the new project as part of its accounting process. However additional head office costs directly attributable to the new project are expected to be €80,000 per annum. The opening of the new division is expected to yield benefits to other divisions within Halyard plc. This benefit has been valued at €50,000 per annum. The company's cost of capital is 10%. Required: Assess the viability of the proposed new division using a discounted cash flow project appraisal technique and advise management.

Answer rating: 100% (QA)

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