Reference no: EM133168625
Question - Springer Ltd is planning to launch a new product that will require capital investment in new Plant and Machinery at a cost of €8,600,000.
The product will come to the market at a launch price per unit of €160 in year 1. This price is expected to increase by 7% per annum until the end of year 4.
Forecast demand for the product is as follows:
|
Year
|
1
|
2
|
3
|
4
|
5
|
|
Units sold per annum
|
10,500
|
26,000
|
40,000
|
30,000
|
18,000
|
The company expects the following variable costs per unit (at current prices):
Materials €36
Labour €14
Throughout the lifecycle of the product variable costs are expected to increase as follows:
Materials are expected to increase in price by 10% per annum. Labour costs per unit are expected to increase by €1 per annum.
The product will incur fixed costs of €750,000 per annum.
Springer Ltd pays Corporation tax at 15%, payble one year in arrears. No Capital allowances are available to the firm.
The Plant & Machinery used to manufacture the product is expected to be used for the full 5 years, and will then be sold for €3,800,000
Springer Ltd has a Cost of Capital of 11% per annum
Required -
1. Calculate the Net Present Value of the Capital Investment.
2. Calculate the Internal Rate of Return of the Capital Investment.
3. Comment on the financial acceptability of the project.