Q3. ABC steel plant industry plans to manufacture a product. The product needs a special component....

 

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Q3. ABC steel plant industry plans to manufacture a product. The product needs a special component. The industry has reviewed that the special component can be produced in the plant or bought in. An investment is required to start the production of the component for which two mutually exclusive projects A and B representing different production processes are available. The alternative option is to buy in from another company representing project C. The details of projects A and B are given in Table 3: (i) Using the information from table 3 and Discount Cash Flow criteria, calculate Pay Back Period (PBP), Account Rate of Return (ARR), Net Present Value (NPV) and Internal Rate Return (IRR) for project A & Project B if the industry plans to sale the unit cost of RO 350. [28 Marks] [Marking Rubrics: Back Period (PBP) for the project A & project B - 4 Marks, Account Rate of Return (ARR) for project A & project B - 4 Marks, Net Present Value (NPV) for the project A & project B-8 Marks, and Internal Rate Return (IRR) for the project A & project B-12 Marks.] (ii) Using the annual cost data from table 3, determine which project incurs less cost if the industry considers producing 7,500 units per year. [4 Marks] (iii) Using the table 3, determine the Break-Even quantity and margin of safety (units and value) If the company sells 8,000 units of new product per year at a price of RO 50 per unit. [8 Marks] Table 3 Description Capital (RO) Life (years) Project-A 379,200 15 Project-B 475,450 15 12,000 10,000 Sales Quantity (units per year) Salaries per year (RO) 45,000 50,000 Other fixed costs per year (RO) 40,000 85,000 Wages per year (RO) 70,000 80,000 Cost of materials per year (RO) 210,960 278,060 35,000 40,000 Other variable costs per year (RO) Scrap value at the end of the year (RO) 34,930 44,390 Cost of capital (%) 14 14 Q3. ABC steel plant industry plans to manufacture a product. The product needs a special component. The industry has reviewed that the special component can be produced in the plant or bought in. An investment is required to start the production of the component for which two mutually exclusive projects A and B representing different production processes are available. The alternative option is to buy in from another company representing project C. The details of projects A and B are given in Table 3: (i) Using the information from table 3 and Discount Cash Flow criteria, calculate Pay Back Period (PBP), Account Rate of Return (ARR), Net Present Value (NPV) and Internal Rate Return (IRR) for project A & Project B if the industry plans to sale the unit cost of RO 350. [28 Marks] [Marking Rubrics: Back Period (PBP) for the project A & project B - 4 Marks, Account Rate of Return (ARR) for project A & project B - 4 Marks, Net Present Value (NPV) for the project A & project B-8 Marks, and Internal Rate Return (IRR) for the project A & project B-12 Marks.] (ii) Using the annual cost data from table 3, determine which project incurs less cost if the industry considers producing 7,500 units per year. [4 Marks] (iii) Using the table 3, determine the Break-Even quantity and margin of safety (units and value) If the company sells 8,000 units of new product per year at a price of RO 50 per unit. [8 Marks] Table 3 Description Capital (RO) Life (years) Project-A 379,200 15 Project-B 475,450 15 12,000 10,000 Sales Quantity (units per year) Salaries per year (RO) 45,000 50,000 Other fixed costs per year (RO) 40,000 85,000 Wages per year (RO) 70,000 80,000 Cost of materials per year (RO) 210,960 278,060 35,000 40,000 Other variable costs per year (RO) Scrap value at the end of the year (RO) 34,930 44,390 Cost of capital (%) 14 14

Answer rating: 100% (QA)

1 project A Project B Capital 379200 475450 life years 15 15 sales quantity units per year 10000 12000 salaries per year 45000 50000 other fixed costs per year 40000 85000 wages per year 70000 80000 c... View the full answer