Reference no: EM133022391

Question - In 2012, Bibi bv plans to invest an amount of 1,000,000 in a machinery that will produce product Api. The economic life of this investment is 10 years and the residual value is equal to 200,000,-. When determining the interest costs, Bibi bv assumes a percentage of 8% over the average capital invested in the machine over the entire life. The remaining constant costs are 22,000,-. Bibi bv expects 5.000 units to be generated annually with the investment. In the manufacture of Api, the net raw material consumption is equal to 2.4 kg for a standard waste of 20%. A kilo of raw material costs 5 euros, and the waste yields 1 euro per kg. Per product, a 1.5 man-hour is required at 25 euros per man-hour excluding 20% social charges. The other variable costs are 10.60 euros per product. The profit per product API is equal to 20% of the sales price. The tax payable by Bibi bv amounts to 30% of the profit.

Required -

A. Determine the sales price of the product Api.

B In the event of a decision whether to invest in the machinery, Bibi bv is guided by the method of payback period. Calculate the cash flows associated with the investment project for individual years. When calculating cash flows, a corporate tax rate of 30% should be taken into account.

C. Determine the payback period. Assume that cash flows arrive evenly over the year.

D. The management of Bibi bv decides to make the decision on whether to invest in the machinery depend on the net constant value method. This is calculated with a desired interest rate of 10%. Calculate the net constant value of the investment. Assume that cash flows will arrive at the end of the year.