Butcher Butcher is considering whether to invest in a new product, the Zam. Details of the Zam are as follows: £ £ Selling price 22.00 Direct labour 5.00 Material 4.50 Variable overheads 2.50 12.00 Contribution 10.00 The company expects to sell 10,000 each year for 5 years and to incur additional fixed costs of £13,000 pa. It has a cost of capital of 15%. The product would require the purchase of a machine for £300,000, which would be sold at the end of the project for £50,000. Required: Calculate the NPV based on the estimates above. Calculate the sensitivity of the decision to changes in the sales price, the material cost per unit, the sales volume and the disposal value of the machine.
Butcher Butcher is considering whether to invest in a new product, the Zam. Details of the Zam are as follows: £ £ Selling price 22.00 Direct labour 5.00 Material 4.50 Variable overheads 2.50 12.00 Contribution 10.00 The company expects to sell 10,000 each year for 5 years and to incur additional fixed costs of £13,000 pa. It has a cost of capital of 15%. The product would require the purchase of a machine for £300,000, which would be sold at the end of the project for £50,000. Required: Calculate the NPV based on the estimates above. Calculate the sensitivity of the decision to changes in the sales price, the material cost per unit, the sales volume and the disposal value of the machine.
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter26: Real Options
Section: Chapter Questions
Problem 5P
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Question
- Butcher
Butcher is considering whether to invest in a new product, the Zam. Details of the Zam are as follows:
|
|
£ |
£ |
|
Selling price |
|
22.00 |
|
Direct labour |
5.00 |
|
|
Material |
4.50 |
|
|
Variable overheads |
2.50 |
|
|
|
|
12.00 |
|
Contribution |
|
10.00 |
The company expects to sell 10,000 each year for 5 years and to incur additional fixed costs of £13,000 pa. It has a cost of capital of 15%.
The product would require the purchase of a machine for £300,000, which would be sold at the end of the project for £50,000.
Required:
- Calculate the
NPV based on the estimates above. - Calculate the sensitivity of the decision to changes in the sales price, the material cost per unit, the sales volume and the disposal value of the machine.
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