The management of Make More plc, a manufacturer of low-cost electronic products, has seen a significant...

 

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The management of Make More plc, a manufacturer of low-cost electronic products, has seen a significant increase in the company's activity despite the financial crisis that has affected business activity in the last two years. They are now facing two decisions for which they have asked you to conduct the analysis and recommend the best course of action. The first decision has to do with a potential investment to make three additional products using a new technology, In order to undertake this investment, Make More is looking to lease a new facility for the next six years, after which it is expected that the technology will be obsolete. The forecasts put together by the management of the business are as follows: Sales of the three products in year one will be 50,000 units at an average price of £55; Sales volume is expected to grow at 20% a year for the first three years, and decrease at 25% a year for the remainder of the project; Cost of sales will start at 65% of sales price and efficiency improvements will lower it by 8%age points from year three; The company has ordered market research to be done for £500,000, which will be paid next month; Selling and administrative expenses specific to this project will be £450,000 and there is an additional allocation of £300,000 from corporate overheads; The lease rent of £150,000 will be payable from year 1, as the owner is waiving the rent for the initial period while refurbishment of the facilities and installation of the machinery is taking place; In order to manufacture the three products, Make More is going to buy equipment worth £lm (a 5% deposit has already been paid). This equipment is expected to have a scrap value of £150,000 in six years' time; Working capital required for the project is £400,000 in year 1, changing in line with sales growth throughout the life of the project; Annual inflation rate is expected to be 2.5%; Corporate tax rate is 21% The current cost of capital of Make More is 15%, but this project is considered to be riskier and the cost of capital for companies with comparable levels of risk is 20% higher. Required: Using the four methods discussed in class, assess this investment opportunity and make a recommendation of whether the company should go ahead with it or not. The management of Make More plc, a manufacturer of low-cost electronic products, has seen a significant increase in the company's activity despite the financial crisis that has affected business activity in the last two years. They are now facing two decisions for which they have asked you to conduct the analysis and recommend the best course of action. The first decision has to do with a potential investment to make three additional products using a new technology, In order to undertake this investment, Make More is looking to lease a new facility for the next six years, after which it is expected that the technology will be obsolete. The forecasts put together by the management of the business are as follows: Sales of the three products in year one will be 50,000 units at an average price of £55; Sales volume is expected to grow at 20% a year for the first three years, and decrease at 25% a year for the remainder of the project; Cost of sales will start at 65% of sales price and efficiency improvements will lower it by 8%age points from year three; The company has ordered market research to be done for £500,000, which will be paid next month; Selling and administrative expenses specific to this project will be £450,000 and there is an additional allocation of £300,000 from corporate overheads; The lease rent of £150,000 will be payable from year 1, as the owner is waiving the rent for the initial period while refurbishment of the facilities and installation of the machinery is taking place; In order to manufacture the three products, Make More is going to buy equipment worth £lm (a 5% deposit has already been paid). This equipment is expected to have a scrap value of £150,000 in six years' time; Working capital required for the project is £400,000 in year 1, changing in line with sales growth throughout the life of the project; Annual inflation rate is expected to be 2.5%; Corporate tax rate is 21% The current cost of capital of Make More is 15%, but this project is considered to be riskier and the cost of capital for companies with comparable levels of risk is 20% higher. Required: Using the four methods discussed in class, assess this investment opportunity and make a recommendation of whether the company should go ahead with it or not.

Answer rating: 100% (QA)

Year 0 1 2 3 4 5 6 1Cost of equipment1mln15Salvage150000121 950000 118500 2NWC reqdNWC 0Sales yr1Sales Yr2 so on 400000 492000 605160 7443468 5722166 ... View the full answer