Calculated the net present value

Assignment Help Financial Accounting
Reference no: EM132777269

Question - 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. The directors are now considering which of the three mutually exclusive options should be taken to exploit the potential of the new product. The options are as follows:

Option 1 - Newton Electronics Ltd could manufacture the hearing aid itself. This would be a new departure, since the business has so far concentrated on research and development projects. However the business has manufacturing space available that it currently rents to another business for € 100,000 a year. Newton Electronics Ltd 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 business 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

Year 1 Year 2 Year 3 Year 4 Year 5

Number of units (000's) 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 for the following three years. In the final year of the products life, the selling price will fall to € 20. Variable production costs are predicted to be € 14 per unit. Fixed production costs (including depreciation) will be € 2.4 million per year. Marketing costs will be € 2 million a year.

Newton Electronics Ltd intend 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 business has a cost of capital of 10% a year.

Option 2 - Newton Electronics Ltd could agree to another business manufacturing and marketing the product under licence. A multinational business, 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 aids will be 10% higher if the multinational business, rather than Newton Electronics manufactures and market the product.

Option 3 - Newton Electronics Ltd could sell the patent rights to Faraday Electricals plc for €24 million, payable in two equal instalments. The first instalment would be payable immediately and the second at the end of two years. This option would give Faraday Electricals plc the exclusive right to manufacture and market the new product.

Required -

a) Calculated the Net Present Value (as a 1 January Year 1) of each of the options available to Newton Electronics Ltd.

b) Identify and discuss any other factors that Newton Electronics Ltd should consider before arriving at a decision.

c) State what you consider to be the most suitable option and why?

Reference no: EM132777269

Questions Cloud

How much increase to net present value this method : Indicate both your choice of method, and how much increase to net present value this method would add over the method you did not select
Calculate the break-even point for the company : Calculate the break-even point for the company in terms of stoves and totales sales and the profit/loss reported at 75% capacity output and 60% capacity output
Calculate the proceeds from assumed exercise of options : The fair market value of Teal's common shares was $9.00 per share throughout fiscal 2021. Calculate the proceeds from assumed exercise of options
Current loan holders would get part of their loan forgiven : As the amount of student loan debt has increased, Is it fair that they had to pay, while current loan holders would get part of their loan forgiven?
Calculated the net present value : Calculated the Net Present Value (as a 1 January Year 1) of each of the options available to Newton Electronics Ltd
Supporting agreement or polite disagreement : Respond to at least one peer by supporting agreement or polite disagreement and adding additional information and ideas to further the discussion.
What is interest income for the year : On Jan. 1, 2020, it sold several integrated circuits to a major customer for a P1,600,000 non-interest bearing note. What is interest income for the year
Personal responsibility-social responsibility : Federalist representative democracy requires both personal responsibility-social responsibility of citizens through personal involvement in democratic process
What is the profitability index of the project : An inflow of $1500 for the next 4 years, and a cost of capital of 10 percent. What is the profitability index of the project

Reviews

Write a Review

Financial Accounting Questions & Answers

  Financial statement analysis and preparation

Financial Statement Analysis and Preparation

  Shareholder of a company

Describe the ways that a person can become a shareholder of a company. Why Wal-Mart would split its stock?

  Financial and accounting principles

An understanding of financial and accounting principles can be a valuable tool for managers. While not all managers will find themselves calculating financial ratios or preparing annual financial data.

  Prepare a statement of cash flow using the direct method

Prepare a Statement of Cash Flow using the Direct Method and Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.

  Financial accounting assignment

This assignment has one case study and two question apart from case study. Questions related to document Liquidation question and Company financial statements question - Torquay Limited

  Prepare general journal entries for goela

Prepare general journal entries for Goela Ltd

  Principles of financial accounting

Prepare the journal entry to record the acquisition of the assets.

  Prepare general journal entries to record the transactions

Prepare general journal entries to record the transactions, assuming use of the periodic inventory system

  Global reporting initiative

Compare the view espoused by the economist Milton Friedman about the social responsibilities of business with the views express by Stigler.

  Explain the iasb conceptual frameworks

Explain the IASB Conceptual Framework's perspective of users and their decisions.

  Determine the company''s financial statements

T he focus of the report is to determine the extent to which you are comfortable relying on the financial statements as presented by management .

  Computation of free cash flow

Computation of Free Cash Flow

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd