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Burley Ltd a manufacturer of building products, mainly supplies the wholesale trade. It has recently suffered falling demand due to economic recession, and thus has spare capacity. It now perceives an opportunity to produce designer ceramic tiles for the home improvement market. It has already paid Rs. 0.5m for market research and a feasibility study. The initial analysis reveals scope for selling 150,000 boxes per annum over a five year period at a price of Rs. 20 per box.
Estimated operating costs, largely based on experience are as follows:
Cost per box of titles (Rs.) (at today's prices):
Material cost 8.00
Direct labor 2.00
Variable overhead 1.50
Fixed overheads (allocated) 1.50
Distribution 2.00
Return from the project would be taxed at 33%. Burley's shareholders require a nominal return of 14% per annum after tax, which includes allowance for generally expected inflation of 5.5% per annum. It can be assumed that all operating cash flows occur at year ends.
Required:
Question 1: Assess the financial desirability of this venture in real terms, finding both the net present value and the internal rate of return of the project.
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