ABC Ltd manufactures a range of frozen convenience meals. The company operates production plants globally and partners with thousands of farmers and growers around the world. It packages, stores and transports its own products, and their products are consumed by millions of customers every day. The company, along with its partnering farmers and growers, have been under increasing pressure to adapt to climate change and mitigate environmental impacts. There has been an increase in water usage across the years and some of the growing regions experienced severe drought. Further, changes in social demand have resulted in increased interest on food safety and quality and sustainable packaging. The production manager of ABC Ltd wants funding for a new and more energy-efficient machine. The machine has a purchase price of $2,300,000, an estimated useful life of four years and no residual value. Projected operating data that shows the incremental revenue and costs for the first year is as follows: Sales 1,200,000 Variable costs 400,000 Contribution margin 800,000 Fixed costs Depreciation 575,000 Other costs 200,000 Total fixed costs 775,000 Net operating income 25,000 Incremental revenue and costs, not including straight-line depreciation, are projected to increase by 10% per annum. The existing equipment can be sold now for $200,000. ABC Ltd requires a rate of return of 7%. Ignore tax implications. Required: Compute the following for the investment proposal Net present value. Payback period.
ABC Ltd manufactures a range of frozen convenience meals. The company operates production plants globally and partners with thousands of farmers and growers around the world. It packages, stores and transports its own products, and their products are consumed by millions of customers every day.
The company, along with its partnering farmers and growers, have been under increasing pressure to adapt to climate change and mitigate environmental impacts. There has been an increase in water usage across the years and some of the growing regions experienced severe drought. Further, changes in social demand have resulted in increased interest on food safety and quality and sustainable packaging.
The production manager of ABC Ltd wants funding for a new and more energy-efficient machine. The machine has a purchase price of $2,300,000, an estimated useful life of four years and no residual value. Projected operating data that shows the incremental revenue and costs for the first year is as follows:
|
Sales |
1,200,000 |
|
|
Variable costs |
400,000 |
|
|
Contribution margin |
800,000 |
|
|
Fixed costs |
||
|
|
575,000 |
|
|
Other costs |
200,000 |
|
|
Total fixed costs |
775,000 |
|
|
Net operating income |
25,000 |
Incremental revenue and costs, not including straight-line depreciation, are projected to increase by 10% per annum. The existing equipment can be sold now for $200,000. ABC Ltd requires a
Required:
Compute the following for the investment proposal
Net present value .- Payback period.
Step by step
Solved in 3 steps with 2 images
