Bose Plc has developed a design for a new I-Pod Docking Station, and is considering whether it is viable to produce the product as a replacement for its existing product whose popularity has decreased in the last year. The company publishes its financial accounts at 31st December 2012, and today is 1st January 2012. As the financial manager of the business you have been provided with the following information:1.The machinery required to produce the station will cost £100million today.
The project is likely to become obsolete after 5 years, at which time the machinery will have an expected resale value of £30million.2.The company has already spent £20million on market research and development of the prototype for the product.3.Production will take place on premises currently owned but rented out by the company for £5million per annum.
4.The annual sales volume over the life of the project is expected to be 100,000, 100,000, 200,000, 300,000 and 200,000 in years 1 to 5 respectively. The selling price per unit will be £300 throughout the life of the project.5.
The variable costs per unit produced are expected to be as follows:a.Materials£90 per machine b.Wages£30 per machine c.Others£30 per machine d.The firm’s fixed costs are currently £50million, and are expected to increase to £55million as a direct result of this project6.
Increases in debtors and creditors are expected to cancel out over the life of the project. The project will require having raw materials equivalent to 10% of next year’s sales over the life of the project. Working capital should be assumed to be fully closed out at the end of the project’s life.7.The machine will be depreciated for tax purposes on a straight line basis over its expected useful life.8.
The company pays tax at a marginal rate of 35%, which is payable during the year in which it arises.9.Assume that all cash flows occur at the end of the year in which they are incurred / received. 10.The opportunity cost of capital for the project is 10%.