N plc is a manufacturer of sports equipment and is proposing to start project V, a...

  
 

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N plc is a manufacturer of sports equipment and is proposing to start project V, a new product line. This project would be for the 4 years from the start of year 2021 to the end of 2024. There would be no production of the new product after 2024. Information: Capital expenditure A feasibility study costing $45,000 was completed and paid for last year. This study recommended that the company buy new plant and machinery costing $1,640,000 to be paid for the start of the project. The machinery and plant would be depreciated at 20% of cost per annum and sold during year 2025 for $242,000 receivable at the end of 2025. As a result of the proposed project it was also recommended that an old machine be sold for cash at the start of the project for its book value of $16,000. This machine had been scheduled to be sold for cash at the end of 2022 for its book value of $12,000. Other data relating to the new product line: 2021 $000 1,000 Sales Debtors (at the year end) Lost contribution on existing products Purchases Creditors (at the year. end) Payments to sub- contractors, including prepayments Net tax payable associated with the project Fixed overheads and advertising: With new line Without new line Notes: 84 30 400 80 60 5 96 1,330 1,200 2022 $000 1,300 115 40 500 100 90 10 142 1,100 1,000 2023 $000 1,500 140 40 580 110 80 8 174 990 900 2024 $000 1,800 160 36 620 120 80 8 275 900 800 The year-end debtors and creditors are received and paid in the following year • The next tax payable has taken into account the effect of any capital allowances. There is a one year time-lag in the payment of tax • The company's cost of capital is a constant 10% per annum Apart from the data and information supplied there are no other implications after 2024. Labour costs From the start of the project, 3 employees currently working in another department and earning $12,000 each would be transferred to work on the new product line, and 1 employee currently earning $20,000 would be promoted to work on the new line at a salary $30,000 per annum. The effect on the transfer of employees from the other department to the project is included in the lost contribution figures given above. As a direct result of introducing the new product line, 4 employees in another department currently earning $10,000 each would have to be made redundant at the end of 2021 and paid a redundancy pay of $15,500 each at the end of 2022. Agreement had been reached with the trade unions for wages and salaries to be increased by 5% each year from the start of 2022. Material costs Material XNT which is already in stock, and for which the company has no other use, cost the company $6,400 last year, and can be used in the manufacture of the new product. If it is not used the company would have to dispose of it at a cost to company of $2,000 in 2021. Material XPZ is also in stock and will be used on the line. It cost the company $11,500 some years ago. The company has no other use for it, but could sell it on the open market for $3,000 in 2021. Required: a) Prepare and present the estimated incremental net cash flows and calculate the Net Present Value (NPV) from project V. Explain any figures excluded from your presentation/calculations b) Advise management whether or not the project should be undertaken and list other factors which would also need to be considered. N plc is a manufacturer of sports equipment and is proposing to start project V, a new product line. This project would be for the 4 years from the start of year 2021 to the end of 2024. There would be no production of the new product after 2024. Information: Capital expenditure A feasibility study costing $45,000 was completed and paid for last year. This study recommended that the company buy new plant and machinery costing $1,640,000 to be paid for the start of the project. The machinery and plant would be depreciated at 20% of cost per annum and sold during year 2025 for $242,000 receivable at the end of 2025. As a result of the proposed project it was also recommended that an old machine be sold for cash at the start of the project for its book value of $16,000. This machine had been scheduled to be sold for cash at the end of 2022 for its book value of $12,000. Other data relating to the new product line: 2021 $000 1,000 Sales Debtors (at the year end) Lost contribution on existing products Purchases Creditors (at the year. end) Payments to sub- contractors, including prepayments Net tax payable associated with the project Fixed overheads and advertising: With new line Without new line Notes: 84 30 400 80 60 5 96 1,330 1,200 2022 $000 1,300 115 40 500 100 90 10 142 1,100 1,000 2023 $000 1,500 140 40 580 110 80 8 174 990 900 2024 $000 1,800 160 36 620 120 80 8 275 900 800 The year-end debtors and creditors are received and paid in the following year • The next tax payable has taken into account the effect of any capital allowances. There is a one year time-lag in the payment of tax • The company's cost of capital is a constant 10% per annum Apart from the data and information supplied there are no other implications after 2024. Labour costs From the start of the project, 3 employees currently working in another department and earning $12,000 each would be transferred to work on the new product line, and 1 employee currently earning $20,000 would be promoted to work on the new line at a salary $30,000 per annum. The effect on the transfer of employees from the other department to the project is included in the lost contribution figures given above. As a direct result of introducing the new product line, 4 employees in another department currently earning $10,000 each would have to be made redundant at the end of 2021 and paid a redundancy pay of $15,500 each at the end of 2022. Agreement had been reached with the trade unions for wages and salaries to be increased by 5% each year from the start of 2022. Material costs Material XNT which is already in stock, and for which the company has no other use, cost the company $6,400 last year, and can be used in the manufacture of the new product. If it is not used the company would have to dispose of it at a cost to company of $2,000 in 2021. Material XPZ is also in stock and will be used on the line. It cost the company $11,500 some years ago. The company has no other use for it, but could sell it on the open market for $3,000 in 2021. Required: a) Prepare and present the estimated incremental net cash flows and calculate the Net Present Value (NPV) from project V. Explain any figures excluded from your presentation/calculations b) Advise management whether or not the project should be undertaken and list other factors which would also need to be considered.

Answer rating: 100% (QA)

aThe estimated incremental cash flows for the project are as follows Year Cash Flow 2021 000 2022 2023 2024 Sales 5000 7500 10000 12500 15000 Debtors ... View the full answer