around the country. This has been well received by everyone who has tested it and you are now faced with 3 possible options: Option 1 Sell all the rights in the software for five annual amounts of £14,000 payable at the end of each year, with the first payment payable immediately Option 2 Subcontract a local electronics company to produce the software. You would then purchase the product and market it yourself by running your own business. This would mean resigning from your existing job for which you earn an average of £20,000 per annum. Your sales would generate cash profits of £40,000 per annum for 5 years. The local electronics manufacturer is insisting on receiving £20,000 working capital deposit immediately from you as security that it will not be left holding any unwanted stock. The deposit would be released at the end of the five year contract. Option 3 You could set up your own company to manufacture and sell the software. You have estimated the following data for the five year period: Machinery – Initial cost Initial working capital Annual sales Variable costs per year £ 20,000 10,000 (recouped at end of the project) 160,000 90,000 Fixed costs per year 30,000 (additional due to the project) You would need to give up your current job to manage the proposal The cost of finance is 18% REQUIRED: (a) Evaluate the three alternatives using the Net Present Value method of project appraisal.
around the country. This has been well received by everyone who has tested it and you are now faced with 3 possible options: Option 1 Sell all the rights in the software for five annual amounts of £14,000 payable at the end of each year, with the first payment payable immediately Option 2 Subcontract a local electronics company to produce the software. You would then purchase the product and market it yourself by running your own business. This would mean resigning from your existing job for which you earn an average of £20,000 per annum. Your sales would generate cash profits of £40,000 per annum for 5 years. The local electronics manufacturer is insisting on receiving £20,000 working capital deposit immediately from you as security that it will not be left holding any unwanted stock. The deposit would be released at the end of the five year contract. Option 3 You could set up your own company to manufacture and sell the software. You have estimated the following data for the five year period: Machinery – Initial cost Initial working capital Annual sales Variable costs per year £ 20,000 10,000 (recouped at end of the project) 160,000 90,000 Fixed costs per year 30,000 (additional due to the project) You would need to give up your current job to manage the proposal The cost of finance is 18% REQUIRED: (a) Evaluate the three alternatives using the Net Present Value method of project appraisal.
Chapter3: Cost-volume-profit Analysis
Section: Chapter Questions
Problem 8EB: Shonda & Shonda is a company that does land surveys and engineering consulting. They have an...
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around the country. This has been well received by everyone who has tested it and you are now faced with 3 possible options:
Option 1
Sell all the rights in the software for five annual amounts of £14,000 payable at the end of each year, with the first payment payable immediately
Option 2
Subcontract a local electronics company to produce the software. You would then purchase the product and market it yourself by running your own business. This would mean resigning from your existing job for which you earn an average of £20,000 per annum. Your sales would generate cash profits of £40,000 per annum for 5 years.
The local electronics manufacturer is insisting on receiving £20,000 working capital deposit immediately from you as security that it will not be left holding any unwanted stock. The deposit would be released at the end of the five year contract.
Option 3
You could set up your own company to manufacture and sell the software. You have estimated the following data for the five year period:
Machinery – Initial cost Initial working capital Annual sales
Variable costs per year
£ 20,000
10,000 (recouped at end of the project) 160,000
90,000
Fixed costs per year 30,000 (additional due to the project)
You would need to give up your current job to manage the proposal
The cost of finance is 18%
REQUIRED:
(a) Evaluate the three alternatives using the Net Present Value method of project appraisal.
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