Njenge is a special purpose vehicle set up by the Football Association of Zambia (FAZ) and the National Sports Council of Zambia (NSCZ) to undertake a project to manufacture an innovative muscle toning device (Muleza) that will be used in the treatment of sporting injuries. It is expected that the commercial life of the Muleza will be four years after which technological advances will bring more sophisticated devices to the market and the sales will fall to virtually zero. K8, 000,000 has been spent in developing and testing the device over the past year. Initial market research has been conducted at a cost of K2, 500,000 and is due to be paid shortly. The market research indicates the following demand and selling price per unit: Year (from now) Units demand Selling Price 2 2,000 K2, 000 3 70,000 K2,200 4 125,000 K1,600 5 20,000 K1,400 A factory will be built to produce the Muleza for K30, 000,000 and will take a year to complete. Payment will be made in two instalments; the first instalment of K18, 000,000 is payable immediately and the remainder in a year's time. The factory building is expected to be sold for K25, 000,000 when the production and sales cease. Machinery costing K16, 000,000 will be installed at the end of the first year. The machinery will be depreciated on a straight-line basis over the next four years and is expected to have a nil value at the end of the four years. At present the materials cost of making one Muleza unit is K700. Njenge has enough materials in stock to make 1,500 units, which it had purchased a year ago for K450 per Muleza unit. If the project does not go ahead then these materials will be sold for an equivalent of K120 per Muleza unit. Labour that will be used to make the Muleza is to be made redundant immediately at a cost of K2,000,000 if the project does not go ahead. Labour costs per unit are K250. It is expected that once the project is completed, the labour will be made redundant at a cost of K3, 500,000. Fixed production overheads relating specifically to the production of the Muleza are expected to be K13,000,000 per annum and variable production overheads are expected to be K150 per Muleza unit produced and sold. Administrative costs are expected to be K17, 000,000 per annum of which
Njenge is a special purpose vehicle set up by the Football Association of Zambia (FAZ) and the National Sports Council of Zambia (NSCZ) to undertake a project to manufacture an innovative muscle toning device (Muleza) that will be used in the treatment of sporting injuries. It is expected that the commercial life of the Muleza will be four years after which technological advances will bring more sophisticated devices to the market and the sales will fall to virtually zero. K8, 000,000 has been spent in developing and testing the device over the past year. Initial market research has been conducted at a cost of K2, 500,000 and is due to be paid shortly. The market research indicates the following demand and selling price per unit: Year (from now) Units demand Selling Price 2 2,000 K2, 000 3 70,000 K2,200 4 125,000 K1,600 5 20,000 K1,400 A factory will be built to produce the Muleza for K30, 000,000 and will take a year to complete. Payment will be made in two instalments; the first instalment of K18, 000,000 is payable immediately and the remainder in a year's time. The factory building is expected to be sold for K25, 000,000 when the production and sales cease. Machinery costing K16, 000,000 will be installed at the end of the first year. The machinery will be depreciated on a straight-line basis over the next four years and is expected to have a nil value at the end of the four years. At present the materials cost of making one Muleza unit is K700. Njenge has enough materials in stock to make 1,500 units, which it had purchased a year ago for K450 per Muleza unit. If the project does not go ahead then these materials will be sold for an equivalent of K120 per Muleza unit. Labour that will be used to make the Muleza is to be made redundant immediately at a cost of K2,000,000 if the project does not go ahead. Labour costs per unit are K250. It is expected that once the project is completed, the labour will be made redundant at a cost of K3, 500,000. Fixed production overheads relating specifically to the production of the Muleza are expected to be K13,000,000 per annum and variable production overheads are expected to be K150 per Muleza unit produced and sold. Administrative costs are expected to be K17, 000,000 per annum of which
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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https://www.bartleby.com/questions-and-answers/finance-question/89c709bb-b568-401f-a90e-c8cdf900ce1a
You need to find the NPV. Calculate the net cashflow and discount factors to find NPV
Transcribed Image Text:Njenge is a special purpose vehicle set up by the Football Association of Zambia (FAZ) and
the National Sports Council of Zambia (NSCZ) to undertake a project to manufacture an
innovative muscle toning device (Muleza) that will be used in the treatment of sporting
injuries. It is expected that the commercial life of the Muleza will be four years after which
technological advances will bring more sophisticated devices to the market and the sales will
fall to virtually zero. K8, 000,000 has been spent in developing and testing the device over
the past year. Initial market research has been conducted at a cost of K2, 500,000 and is due
to be paid shortly. The market research indicates the following demand and selling price per
unit:
Year (from now)
Units demand
Selling Price
2
2,000
K2, 000
3
70,000
K2,200
4
125,000
K1,600
5
20,000
K1,400
A factory will be built to produce the Muleza for K30, 000,000 and will take a year to complete.
Payment will be made in two instalments; the first instalment of K18, 000,000 is payable
immediately and the remainder in a year's time. The factory building is expected to be sold for
K25,000,000 when the production and sales cease.
Machinery costing K16, 000,000 will be installed at the end of the first year. The machinery will
be depreciated on a straight-line basis over the next four years and is expected to have a nil value
at the end of the four years.
At present the materials cost of making one Muleza unit is K700. Njenge has enough materials in
stock to make 1,500 units, which it had purchased a year ago for K450 per Muleza unit. If the
project does not go ahead then these materials will be sold for an equivalent of K120 per Muleza
unit.
Labour that will be used to make the Muleza is to be made redundant immediately at a cost of
K2,000,000 if the project does not go ahead. Labour costs per unit are K250. It is expected that
once the project is completed, the labour will be made redundant at a cost of K3, 500,000.
Fixed production overheads relating specifically to the production of the Muleza are expected to
be K13,000,000 per annum and variable production overheads are expected to be K150 per Muleza
unit produced and sold. Administrative costs are expected to be K17, 000,000 per annum of which
Transcribed Image Text:K5,500,000 is allocated from the head office and the remainder relates directly to the production
of the Muleza.
Working capital of K10,000,000 will be required at the beginning of the second year once the
production and sales have commenced. This will be released when the production and sales cease.
The relevant cost of capital for the project is 9%.
Assume that all cash flows occur at the year- end unless stated otherwise. All workings should be
in K'000s to the nearest K'000. Ignore tax and inflation.
Required:
(a) Calculate the net present value and internal rate of return of the project and recommend
whether the Muleza should be produced. Provide a brief justification of the cash flows included
and excluded in the calculations.
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