Lee, a division of a company, is considering a four-year investment opportunity which involves a new product
Question:
Lee, a division of a company, is considering a four-year investment opportunity which involves a new product and which will require building a new factory which costing £2.2 million. The factory will have a scrap value of £0.4m at the end of the project (the end of four years). Lee has paid for market research to be undertaken. The market research was undertaken last year and cost £250,000. If Lee builds the factory it expects sales of £950,000 each year. The sales of other products produced by Lee are expected to fall by £150,000 in each of the four years if the project goes ahead. The total running costs of production are estimated to be £145,000 each year. Lee depreciates building costs on a straight-line basis. There is no taxation. All values are on the basis that inflation is zero over the next four years. The impact of any inflation can be ignored. The current real rate of return on projects of this type is 8% and the current inflation rate is 6%. Apart from immediate costs, assume all cash flows occur at the end of the year to which they relate.
Determine the NPV of the project (to the nearest £10).
a
–301,840
b
-£51,840
c
£263,460
d
£13,460
e
None of the above
Advanced Financial Accounting
ISBN: 978-0078025624
10th edition
Authors: Theodore E. Christensen, David M. Cottrell, Richard E. Baker