Reference no: EM133164627
Hair Drier
A manufacturing company is thinking of producing a new hair drier to sell at £25 each. The project will require additional machinery costing £600,000 that will last for five years. Other machinery will be necessary but fortunately is already at hand; if this to be scrapped it is unlikely to fetch more than £2,000. At the end of the project all the machinery will be sold for an estimated £75,000.
At the beginning of the project it will be necessary to spend £100,000 on building up stock though the same amount will be realised on its disposal at the end of the project.
It is expected that 50,000 hair driers will be sold in each of the five years of the project. The accountant has worked out the costs per unit:
Selling price £25
Materials and components £12
Variable labour cost £5
Variable overhead £2
Depreciation £2
Other Fixed overheads £3
£24
Profit £1
The other fixed overheads are allocated to products in proportion to labour costs although the total is not expected to change as a result of the hair drier project except as follows:
• Annual maintenance is expected to be £25,000 per year.
• Advertising will be £170,000 in the first year and £20,000 in subsequent years.
• It will be necessary to recruit a project manager at £50,000 per year. However, as a result of his recruitment the company hopes to save £1,250 per month on consultants' fees.
Required:
a) Identify the relevant cash flows for the project
b) Calculate the payback period for this project
c) Calculate the N.P.V. of the project (cost of capital is 12%)
d) Outline five other issues (financial and non-financial) that would need to be considered in reaching a decision on this project.
e) Comment on the advantages and limitations of the key findings related to this project.