Reference no: EM133025121

Question - Tressor Ltd is evaluating the purchase of a new machine to produce its product, which has a short product life-cycle due to rapidly changing technology. The machine is expected to cost Rs1 million. Production and sales of its product are forecasted to be as follows:

Year Production and sales (units/year)

1 35,000

2 53,000

3 75,000

4 36,000

The selling price of the product (in current price terms) will be Rs20 per unit, while the variable cost of the product (in current price terms) will be Rs12 per unit. Selling price inflation is expected to be 4% per year and variable cost inflation is expected to be 5% per year. No increase in existing fixed costs is expected since Tressor Ltd has spare capacity in both space and labour terms. Producing and selling the product will call for increased investment in working capital.

Analysis of historical levels of working capital within the company indicates that at the start of each year, investment in working capital for its product will need to be 7% of sales revenue for that year. The company pays tax of 25% per year in the year in which the taxable profit occurs. The new machine is expected to have no scrap value at the end of the four-year period. Tressor Ltd uses a nominal (money terms) after-tax cost of capital of 12% for investment appraisal purposes.

Required - Determine the net present value of the proposed investment in product.