Salam Ltd Company currently sends out its vehicles for painting to specialist firms. During the last financial
Question:
Salam Ltd Company currently sends out its vehicles for painting to specialist firms. During the last financial year, the number of vehicles painted was 796 at a cost of £224,472. You are considering the possibility of this work being undertaken by the company in a workshop set up for this purpose. The following information relates to the project:
The paint shop can be set up in an existing building that has not been used for some years and is estimated to be worth £250,000.
Equipment costing £480,000 needs to be purchased with a life expectancy of 6 years. The residual value is estimated as £96,000 at the end of year 6.
The annual costs in today’s money of the operation are estimated to be:
Rates and maintenance | £17,920 |
Management | £21,400 |
Labour | £46,970 |
Head office costs | £25,000 |
Based on the number of vehicles painted last year, the cost of consumable materials and other variable costs is estimated at £30,248 based on the number of vehicles painted last year.
Tax will be recoverable in year 2 and payable thereafter as shown below:
Year 2 | £25,220 | Recoverable |
Year 3 | £10,780 | Payable |
Year 4 | £16,180 | Payable |
Year 5 | £20,230 | Payable |
Year 6 | £23,268 | Payable |
Year 7 | £46,049 | Payable |
The head office costs are a re-allocation of existing overheads.
Required:
Calculate the following performance indicators relating to the proposal:
1- NPV based on a cost of capital of 12%.
2- IRR.
3- Payback period in both nominal and present-value terms?
Do these indicators suggest that the project should be undertaken?
Accounting
ISBN: 978-1118608227
9th edition
Authors: Lew Edwards, John Medlin, Keryn Chalmers, Andreas Hellmann, Claire Beattie, Jodie Maxfield, John Hoggett