You were appointed, on 1 October 2021, as a financial adviser to the owner of a small face mask manufacturer. Before the COVID-19 pandemic, the business had made a net profit of £20,000 per annum. Since the pandemic the net profit has doubled to £40,000 per annum. Your client has a positive relationship with his local bank and has access to a business account that earns 2% per annum on any deposits, and a rolling loan agreement that charges 4% per annum on any borrowings. In previous years the owner simply invested any profits in the deposit account which has grown to £150,000. Your client has decided that the company's profits ought to be put to better use and has brought to you the following opportunity to advise on:

Temporarily diversify the business into the manufacture of hand sanitizer. The venture requires a single initial investment of £100,000 for new machinery and materials. The net annual income from this project is expected to be zero for the first 3 years before making an annual profit of £10,000 in the fourth year, increased by £1,000 per annum for the subsequent 11 years. After this 15 years, the machinery will be obsolete and have an estimated scrap value of £5,000. New employees with specialist skills would be required from the outset and the salary cost of these has been factored into the data given.

Please give me your comment on that and all calculations

Answer rating: 100% (QA)

SOLUTION To invest 100000 for new machinery and materials you need to use the amount 150000 ... View the full answer