Yummy Pte Ltd is a private family-run business considering introducing a new Enterprise Resource Planning (ERP)...

 

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Yummy Pte Ltd is a private family-run business considering introducing a new Enterprise Resource Planning (ERP) system. This will automate its existing manual system while achieving many efficiency benefits primarily in its supply chain and stock management systems. The company was started over 40 years ago to produce and sell high-quality breakfast cereal. The cereal production process involves the acquisition of the raw materials that are cleansed, mixed, tested and packaged in boxes and larger cartons. It has been estimated that with the introduction of the ERP system, extra sales figures over the next five years will be as follows: Year Sales units of premium cereal (large packaged units) 30000 2 35000 40000 42000 38000 The variable manufacturing costs are as follow: Direct materials Direct labour 11 Variable overheads Other Information: The selling price of the large packaged units of cereal is expected to stay at its current level of S40 per unit for the next two years but will increase by 5% in Year 3 of the project and remain at that level. Fixed manufacturing costs 'year s80,000 Cost of purchasing and implementing ERP $200,000 Capital cost of extra production machinery $400,000 Scrap value of extra production machinery after 5 years $15.000 The company's cost of capital is 10% per annum. Required: a. Calculate the net present value (NPV) of making the investment in the new ERP system. (13 marks) b. Explain, with reasons, whether or not the product should be launched. (2 marks) c. Critically analyse the benefits and limitations of the Payback Period and NPV investment appraisal methods. (10marks) Yummy Pte Ltd is a private family-run business considering introducing a new Enterprise Resource Planning (ERP) system. This will automate its existing manual system while achieving many efficiency benefits primarily in its supply chain and stock management systems. The company was started over 40 years ago to produce and sell high-quality breakfast cereal. The cereal production process involves the acquisition of the raw materials that are cleansed, mixed, tested and packaged in boxes and larger cartons. It has been estimated that with the introduction of the ERP system, extra sales figures over the next five years will be as follows: Year Sales units of premium cereal (large packaged units) 30000 2 35000 40000 42000 38000 The variable manufacturing costs are as follow: Direct materials Direct labour 11 Variable overheads Other Information: The selling price of the large packaged units of cereal is expected to stay at its current level of S40 per unit for the next two years but will increase by 5% in Year 3 of the project and remain at that level. Fixed manufacturing costs 'year s80,000 Cost of purchasing and implementing ERP $200,000 Capital cost of extra production machinery $400,000 Scrap value of extra production machinery after 5 years $15.000 The company's cost of capital is 10% per annum. Required: a. Calculate the net present value (NPV) of making the investment in the new ERP system. (13 marks) b. Explain, with reasons, whether or not the product should be launched. (2 marks) c. Critically analyse the benefits and limitations of the Payback Period and NPV investment appraisal methods. (10marks)