Reference no: EM132594828

AB Ltd is a cosmetics manufacturer founded in the country of Ezipet, whose home currency is Ezipet dollar EZ$. The company is considering manufacturing a range of organic skin friendly face wash that will meet a niche market in Ezipet and in the neighbouring countries. The production will require an acquisition of manufacturing equipment at a cost of EZ$650,000, and the scrap value at the end of expected 4-year project life will be EZ$242,000.

AB Ltd have estimated the face wash price as at today's value. The product will sell at a price of EZ$20 per unit and this price will increase in line with inflation in Ezipet which is expected to continue at the current rate of 5% per annum. The company expects to sell 15,000 units in the first year, increasing at a rate of 2% each year. The costs of manufacturing the face wash will consist of direct material cost of EZ$2 per unit, direct labour cost of EZ$5 per unit, these costs have been estimated at today's value and will increase in line with inflation in Ezipet. The fixed overheads will be EZ$40,000 per annum.

The working capital equal to 10% of expected sales value for the first year will be required at the beginning, and will increase by EZ$8,000 in year 3. At the end of the project the working capital will be released. Corporation tax in Ezipet is 30%, payable one year in arrears. The tax allowable depreciation is at 20% on a reducing balance method. The required rate of return for the project is 11%.

Question 1: Estimate the net present value of the project and advise the directors of AB Ltd whether it should manufacture the face wash product. and also explain the usefulness of payback period as a proejct selectioon critierion

Question 2: Discuss any four non-financial objectives that a company should consider when making investment decisions.