Reference no: EM132409944

Managing Finance

Level 5

Learning Outcomes

LO 2. Calculate costs of products or services

LO 3. Select and use appropriate techniques for short term and long term decision making

Assignment Description

Case Study

Beta plc is contemplating leasing a factory building on a four-year agreement from 1 January Year 1, investing in some new plant/equipment and using it to produce a new product, code named NP1. Since there appears to be no possibility of the plant continuing to be economically viable beyond a four-year life, it has been decided to assess the new product over a four-year manufacturing and sales life.

Under the lease the business will pay £100,000 annually in advance on 1 January.

The plant is expected to cost £750,000. This will be bought and paid for on 1 January Year 1 and is expected to be scrapped (zero proceeds) on 31 December Year 4. The business will depreciate this asset, in its accounts, on a straight-line basis (25% each year).

Each unit of NP1 is estimated to give rise to a variable labour cost of £220 and a variable material cost of £80. NP1 manufacture will be charged with an annual share of the business’s administrative costs, totalling £150,000 each year. Manufacture and sales of NP1s are expected to increase total administrative costs by £90,000 each year.

Manufacture and sales of NP1s are expected to be as follows:

Year ending 31 December Year Units of NP1

1 400

2 600

3 400

4 200

These will be sold for an estimated £1,500 each.

The business will need to support the manufacture and sales of the product with working capital for the period of the project. This has been estimated at £50,000 and will be introduced at the start of the project.

The business’s accounting year end is 31 December each year.

It has been decided, given the level of risk involved with the project to use a discount rate of 15% a year.

Task

Produce a 2000 word report in which you:

Identify the annual net relevant cash flows and use this information to assess the project on a net present value basis at 1 January Year 1.

Estimate the internal rate of return of the project.

Advise whether the project should go ahead

Critically appraise the use discounted cash flow techniques such as NPV and IRR for making capital investment decisions.

Your report should include:

Executive summary, Introduction, main body (with sub-sections), conclusion/recommendations, reference list and any supporting appendices.