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Brown Ltd is considering buying a new machine which would have a useful economic life of five years a cost of £125 000 and a scrap value of £30 000 with 80 per cent of the cost being payable at the

Brown Ltd is considering buying a new machine which would have a useful economic life of five years a cost of £125 000 and a scrap value of £30 000 with 80 per cent of the cost being payable at the

Brown Ltd is considering buying a new machine which would have a useful economic life of five years, a cost of £125 000 and a scrap value of £30 000, with 80 per cent of the cost being payable at the start of the project and 20 per cent after one year. The machine would produce 50 000 units per year of a new product with an estimated selling price of £3 per unit. Direct costs would be £1.75 per unit and annual fixed costs, including depreciation calculated on a straight-line basis (equal annual amounts), would be £40 000 per annum.

In years 1 and 2, special sales promotion expenditure, not included in the above costs, would be incurred, amounting to £10 000 and £15 000, respectively.

Evaluate the project using the NPV method of investment appraisal, assuming the company’s cost of capital is 10 per cent.

Tripti 08-Jul-2020

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