Revive_Sunnah
17-01-08, 02:06 PM
Salamalaikum i need help, my exam is 2moz and i need to know how to do the Net present value for this. Help
Newton Electronics Ltd has incurred expenditure of £5 million over the past three years researching and developing a miniature hearing aid. The hearing aid is now fully developed and the directors of the company are considering which of three mutually exclusive options should be taken to exploit the potential of the new product. The options are as follows:
1. The company could manufacture the hearing aid itself. This would be a new departure for the company which has so far concentrated on research and development projects only. However, the company has manufacturing space available which it currently rents to another business for £100,000 per annum. The company would have to purchase plant and equipment costing £9 million and invest £3 million in working capital immediately for production to begin.
A market research report, for which the company paid £50,000, indicates that the new product has an expected life of five years. Sales of the product during this period are predicted as follows:
Predicted sales for the year ended 30 November
19X3 19X4 19X5 19X6 19X7
Number of units ('000) 800 1,400 1,800 1,200 500
The selling price per unit will be £30 in the first year but will fall to £22 in the following three years. In the final year of the product's life, the selling price will fall to £20. Variable production costs are predicted to be £14 per unit and fixed production costs (including depreciation) will be £2.4 million per annum. Marketing costs will be £2 million per annum.
The company intends to depreciate the plant and equipment using the straight-line method based on an estimated residual value at the end of the five years of £1 million. The company has a cost of capital of 10 per cent.
2. Newton Electronics Ltd could agree to another company manufacturing and marketing the product under licence. A multinational company, Faraday Electricals plc, has offered to undertake the manufacture and marketing of the product and, in return, will make a royalty payment to Newton Electronics Ltd of £5 per unit. It has been estimated that the annual number of sales of the hearing aid will be 10 per cent higher if the multinational company, rather than Newton Electronics Ltd, manufactures and markets the product.
3. Newton Electronics Ltd could sell the patent rights for Faraday Electricals plc for £24 million, payable in two equal instalments. The first instalment would be payable immediately and the second would be payable at the end of two years. This option would give Faraday Electricals plc the exclusive right to manufacture and market the new product.
Ignore taxation:
Required:
(a) Calculate the net present value of each of the options available to Newton Electronics Ltd
Newton Electronics Ltd has incurred expenditure of £5 million over the past three years researching and developing a miniature hearing aid. The hearing aid is now fully developed and the directors of the company are considering which of three mutually exclusive options should be taken to exploit the potential of the new product. The options are as follows:
1. The company could manufacture the hearing aid itself. This would be a new departure for the company which has so far concentrated on research and development projects only. However, the company has manufacturing space available which it currently rents to another business for £100,000 per annum. The company would have to purchase plant and equipment costing £9 million and invest £3 million in working capital immediately for production to begin.
A market research report, for which the company paid £50,000, indicates that the new product has an expected life of five years. Sales of the product during this period are predicted as follows:
Predicted sales for the year ended 30 November
19X3 19X4 19X5 19X6 19X7
Number of units ('000) 800 1,400 1,800 1,200 500
The selling price per unit will be £30 in the first year but will fall to £22 in the following three years. In the final year of the product's life, the selling price will fall to £20. Variable production costs are predicted to be £14 per unit and fixed production costs (including depreciation) will be £2.4 million per annum. Marketing costs will be £2 million per annum.
The company intends to depreciate the plant and equipment using the straight-line method based on an estimated residual value at the end of the five years of £1 million. The company has a cost of capital of 10 per cent.
2. Newton Electronics Ltd could agree to another company manufacturing and marketing the product under licence. A multinational company, Faraday Electricals plc, has offered to undertake the manufacture and marketing of the product and, in return, will make a royalty payment to Newton Electronics Ltd of £5 per unit. It has been estimated that the annual number of sales of the hearing aid will be 10 per cent higher if the multinational company, rather than Newton Electronics Ltd, manufactures and markets the product.
3. Newton Electronics Ltd could sell the patent rights for Faraday Electricals plc for £24 million, payable in two equal instalments. The first instalment would be payable immediately and the second would be payable at the end of two years. This option would give Faraday Electricals plc the exclusive right to manufacture and market the new product.
Ignore taxation:
Required:
(a) Calculate the net present value of each of the options available to Newton Electronics Ltd