Isaac Nuamah is the financial manager for Asonoma Micro Dryer Company, a company that manufactures microwaves dryers. Using microwaves eliminates shrinkage of cotton and wool because clothing can be dried at a much lower surface temperature. The company currently offers a full size microwave dryer that is extremely energy efficient and dries clothes much faster than conventional dryer. However, it appears though the Ghanaian consumer is either uninterested in energy efficiency or unwilling to spend the initial cost to purchase the rather high end full size microwave dryer. Thus, Asonoma Micro Dryer Company is considering expanding into a new product – a countertop microwave that could be used   in dorm rooms, apartments and hotels. Isaac is particular excited with this proposal   because the product will be manufactured in a building being owned by the company which is located near the spintex road in Accra.    This vacant building and the land can be sold for GHS5, 000 000.   The proposed cost of the machine for the project is estimated at GHS 16,000,000.

Annual sales of the product are expected to be 30,000 units in years 1 and 2 and will then fall by 5,000 units per year in both years 3 and 4. The selling price of the product in first year is expected to be GHS 440 per unit and this is   expected to inflate by 3% per annum. The variable costs are expected to be GHS 70 per unit in the first year and the incremental fixed costs in the first year are expected to be GGHS30 per unit. Both of these costs are expected to inflate at 5% per annum

The project will require working capital investment equal 10% of sales revenue each year.  This investment must be in place at the start of each year. The asset is expected to have a residual value of GHS4,000, 000. Corporate tax is 30% per annum and is paid one year in arrears. 25% reducing balance writing- down allowance are available.  GHS12, 000 has already be spent on initial research. The after tax of capital of the company is 12%

 
REQUIRED.

a).Based on the above information, what recommendation should Isaac Nuamah make concerning the countertop microwave dryer project?                                                                          
b). Discuss the practical difficulties associated with the use of the investment appraisal method used in appraising the countertop microwave project.                        
c) The financial Accountant of the company believes that using the Accounting Rate of Return to appraise the project will lead to a better decision that the method used in (a) above. Discuss.

Answer rating: 100% (QA)

Step 1 NPV is the net current worth of cash flows that are expected to occur in the future It is cal... View the full answer