Richa food company is a medium sized firm specializing in packaged food items. The R&D department...
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Richa food company is a medium sized firm specializing in packaged food items. The R&D department of company has developed a new product with an expected life of six years. The manufacturing facility of the product will require a cash outlay for s 60 million, which the firm would depreciate over six years .The salvage value is assumed to be zero the company expects to sell one million units p.a. @Rs 60 p.u. .The marketing manager has informed that depending upon the competition and Richa food's response to it, both actual price and actual volume may differ from the expectation. The selling price could decreases much as by 10% under adverse economic condition and could increase by as much as 15% under good economic conditions. Similarly the actual volume may vary from expected volume between -5% to +10%. The accountant felt that actual outlay and variable cost may also be different from the forecasts. The actual outlay may increase by 10% and variable cost by5 % to 10% from the expected values. Following table gives the financial forecast based on the most expected assumptions Selling price Variable cost Material Labour overhead Fixed cost PBT Tax@35% PAT Per unit 60 16 8 6 20 10 3.5 6.5 Total (Rs ;000") 60000 16000 8000 6000 20000 10000 3500 6500 Fixed cost include depreciation on SLM basis. Assume that the company can charge depreciation on SLM basis for tax purpose .The company has the required rate of return 12%. Assume zero inflation. Discussion question 1-Identify, the factors that are most critical to the decision Answer this question by calculating the volume ,selling price, unit variable cost and cash outlay at which the investment NPV would be zero, other things remaining constant 2-What is your recommendations to the company ?State any additional information that will be helpful the answer the question Richa food company is a medium sized firm specializing in packaged food items. The R&D department of company has developed a new product with an expected life of six years. The manufacturing facility of the product will require a cash outlay for s 60 million, which the firm would depreciate over six years .The salvage value is assumed to be zero the company expects to sell one million units p.a. @Rs 60 p.u. .The marketing manager has informed that depending upon the competition and Richa food's response to it, both actual price and actual volume may differ from the expectation. The selling price could decreases much as by 10% under adverse economic condition and could increase by as much as 15% under good economic conditions. Similarly the actual volume may vary from expected volume between -5% to +10%. The accountant felt that actual outlay and variable cost may also be different from the forecasts. The actual outlay may increase by 10% and variable cost by5 % to 10% from the expected values. Following table gives the financial forecast based on the most expected assumptions Selling price Variable cost Material Labour overhead Fixed cost PBT Tax@35% PAT Per unit 60 16 8 6 20 10 3.5 6.5 Total (Rs ;000") 60000 16000 8000 6000 20000 10000 3500 6500 Fixed cost include depreciation on SLM basis. Assume that the company can charge depreciation on SLM basis for tax purpose .The company has the required rate of return 12%. Assume zero inflation. Discussion question 1-Identify, the factors that are most critical to the decision Answer this question by calculating the volume ,selling price, unit variable cost and cash outlay at which the investment NPV would be zero, other things remaining constant 2-What is your recommendations to the company ?State any additional information that will be helpful the answer the question
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To identify the factors that are most critical to the decision we should calculate the Net Present Value NPV of the investment under various scenarios ... View the full answer
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