Reference no: EM133239553

Taste Buds Tea Co are an established UK based company who have been producing high quality black tea, both as loose leaves and in tea bags, for a number of years. They import the tea leaves from all around the world and use them to create their own distinctive blends. They are now considering moving into the market for flavoured infusions. Flavoured infusions are blends of dried fruits, herbs and other leaves which are then sold in tea bags. They intend to use the same suppliers for the ingredients for the infusions, although there are a number of companies within the UK who could supply the ingredients. The Directors of Taste Buds Tea Co. have held their positions for several years and have contributed to the success of the company. During that time, they have being managing from the top down, being reluctant to involve or consult staff in any decisions.

To proceed with the production of flavoured infusion tea bags, they will require a new machine, for which the investment is expected to be £75,000 and the machine is expected to last five years with no scrap value. This machine is to be used to pack the infusion bags into boxes.  Demand for flavoured infusion bags is increasing, there are a number of competitors entering the market, and a decision needs to be made as to whether to invest in a machine specifically for this product.

The machine is expected to pack 45,000 boxes of tea each year which will sell at £2 per box.  Variable production costs are expected to be £1.05 per box and fixed costs, comprising mainly of maintenance costs, are expected to be £15,000 per annum.  The company use a discount factor of 12% and expect projects to recover their initial investment within three years.

Required:

Calculate and comment on the Net Present Value (NPV) of the project and the usefulness of NPV as an appraisal method.