Prepare a memo to the managing director

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Reference no: EM133326708

Terminator Pest Control (TPC), Inc. anticipates unit sales for a new householduse electronic rodent eradication system as follows:

Year Unit sales

1 80,000

2 90,000

3 95,000

4 99,000

5 75,000

The eradication system will require $875,000 in net working capital to start. Total annual fixed costs are expected to be $200,000. Variable production costs are expected to be $75 per unit, and the units are priced at $105 each. The equipment needed to begin production has a purchase cost of $9,000,000, freight and customs duties amount to $500,000 and installation and testing will be $$250,000. In five years, the equipment can be sold for 25% of its purchase cost. TPC has a required return on all its projects of 12%.

Required:

A. Compute the project's cash flows.

B. Calculate:

i. The payback period

ii. Net present value (NPV)

iii. Internal rate of return (IRR)

iv. Accounting rate of return (ARR)

C. Prepare a memo (in good form) to the Managing Director briefly explaining the significance of the required return of 12%, and advising him whether the company should undertake the project. Your advice should be supported by the results of your calculations in part (B). You should also include a discussion of THREE non-financial factors which should be considered when making the decision.

Reference no: EM133326708

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