Skiglo Ltd is a fast-growing young company formed in 2010 who specialise in outdoor winter leisure...

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Skiglo Ltd is a fast-growing young company formed in 2010 who specialise in outdoor winter leisure equipment. The company's objective is to: 0 Grow organically at circa 10% sales growth per annum o Achieve a competitive rate of return 0 Promote health and wellbeing Last year the company made sales of over £60 million and achieved a net profit pre tax of £5 million based on equity employed of £25 million as announced in the annual report for the year ended 31 December 2020. One of the directors has prototyped a new product which combines ski pants with a thermal heating facility previously only applied to ski gloves. A copyright has been acquired for the product. The ski pants are purchased from Norway for £38 (based on current exchange rates) and is then fitted with the thermal heating accessory produced in the company's factory in Peterhead. The prices quoted by the supplier are based on purchases of 6,000 or less per year but this would reduce to £34 if the purchases per year rose above 6,000 and up to 12,000 and then to £32 per unit for purchases in a year above 12,000. There will be significant initial capital expenditure of £2.1 million to equip the factory for production. It is estimated that the product will have a life cycle of 6 years when new innovations will outdate the product. At the end of this period the equipment purchased for the ski pant production will be sold for £160k. The company operate a strict Just In Time policy to stockholding. The variable costs of producing and fitting the thermal function is £52 per unit. It is also expected that there will be fixed salary related costs of £345k per annum and property related costs of £215k per annum. It should be noted that the staff costs are stepped costs and are expected to increase above the £345k spend by 20% should the sales rise above 8,800 units and by a further 10% if the sales should go above 13,200 units (they will also be expected to fall back to the existing level if sales fall back below the step triggers). The products will be introduced using a market skimming pricing policy with anticipated changes in prices during the product's life due to market conditions and its life cycle. The product's prices and the sales volumes expected for the next 6 years are as follows: Year 2023 2024 2025 2026 2027 2028 Sales price £280 £280 £250 £200 £160 £140 Demand 5,000 8,000 10,000 15,000 12,000 6,000 The capital investment will qualify for 60% tax allowances in 2023, the first year, the remainder will qualify for 30% tax allowances per year thereafter, calculated on a reducing balance basis. Any balancing charge or allowance will be calculated at the end of 2028. The company pays tax on its profits at 24%, being payable one year after the profit is earned. All figures quoted above, other than the sales prices, are at current values. Cost inflation is expected to be 2.4% per annum. The company at present use a post-tax market cost of capital of 8.3%. Required: a) Calculate the net present value and internal rate of return for the project as outlined above. Skiglo Ltd is a fast-growing young company formed in 2010 who specialise in outdoor winter leisure equipment. The company's objective is to: 0 Grow organically at circa 10% sales growth per annum o Achieve a competitive rate of return 0 Promote health and wellbeing Last year the company made sales of over £60 million and achieved a net profit pre tax of £5 million based on equity employed of £25 million as announced in the annual report for the year ended 31 December 2020. One of the directors has prototyped a new product which combines ski pants with a thermal heating facility previously only applied to ski gloves. A copyright has been acquired for the product. The ski pants are purchased from Norway for £38 (based on current exchange rates) and is then fitted with the thermal heating accessory produced in the company's factory in Peterhead. The prices quoted by the supplier are based on purchases of 6,000 or less per year but this would reduce to £34 if the purchases per year rose above 6,000 and up to 12,000 and then to £32 per unit for purchases in a year above 12,000. There will be significant initial capital expenditure of £2.1 million to equip the factory for production. It is estimated that the product will have a life cycle of 6 years when new innovations will outdate the product. At the end of this period the equipment purchased for the ski pant production will be sold for £160k. The company operate a strict Just In Time policy to stockholding. The variable costs of producing and fitting the thermal function is £52 per unit. It is also expected that there will be fixed salary related costs of £345k per annum and property related costs of £215k per annum. It should be noted that the staff costs are stepped costs and are expected to increase above the £345k spend by 20% should the sales rise above 8,800 units and by a further 10% if the sales should go above 13,200 units (they will also be expected to fall back to the existing level if sales fall back below the step triggers). The products will be introduced using a market skimming pricing policy with anticipated changes in prices during the product's life due to market conditions and its life cycle. The product's prices and the sales volumes expected for the next 6 years are as follows: Year 2023 2024 2025 2026 2027 2028 Sales price £280 £280 £250 £200 £160 £140 Demand 5,000 8,000 10,000 15,000 12,000 6,000 The capital investment will qualify for 60% tax allowances in 2023, the first year, the remainder will qualify for 30% tax allowances per year thereafter, calculated on a reducing balance basis. Any balancing charge or allowance will be calculated at the end of 2028. The company pays tax on its profits at 24%, being payable one year after the profit is earned. All figures quoted above, other than the sales prices, are at current values. Cost inflation is expected to be 2.4% per annum. The company at present use a post-tax market cost of capital of 8.3%. Required: a) Calculate the net present value and internal rate of return for the project as outlined above.

Answer rating: 100% (QA)

To calculate the net present value NPV and internal rate of return IRR for the project we need to calculate the cash flows for each year and then disc... View the full answer