Reference no: EM133106685

Question - The Marketing Director at Quidditch Caravans is forecasting the following product volumes for their new high-tech caravans:

These high-tech caravan units are expected to retail at £40,000 each and costs are estimated: Direct materials £12,000 each Variable production overhead 50% of direct wages Variable selling and administration overhead 10% of selling price Direct wages are paid at £10 per hour and each caravan unit is expected to take 1,000 direct labour hours. If the project is approved an investment of £1,000,000 in plant and equipment will be needed, this investment will take place at the beginning of 2021 (i.e. the first year of the investment). The company's cost of capital is 10%. The following is an extract from the present value table for £1 for the two scenarios.

Required -

a) Calculate the payback period of the investment.

b) Calculate the Net Present Value of the investment in the plant and equipment.

c) Estimate the Internal Rate of Return of the investment in the plant and equipment.

d) Briefly discuss whether the level of risk in this project is high or low?

e) Discuss how the company may have calculated the cost of capital of 10%.