Reference no: EM132566748

You have been asked to offer guidance on the evaluation of a new product by the directors of Gordon & Clarke Ltd. The company manufactures chilled meals and has developed a range of 'TV dinners' for supermarket sales. A variety of marketing advantages are claimed for the product ranging from menus to packaging, and both the production and marketing directors are confident of the product's likely success. The meeting of the directors has been presented with the following cost and cash flow information:

The company spent $265,000 over the past few months developing and test marketing the range. At the same time it also spent $522,000 on new production equipment for this product. The equipment and the product both have an estimated life of five years, and the residual value on the equipment is $12,000. The company uses straight line depreciation for all equipment.

Projected annual cash flows from sales are $470,000 per annum (these include sales diverted from existing product lines which are estimated to be $95,000 per annum).

Direct costs of production are estimated to be 44% of sales. The production would be housed in currently spare factory and warehouse space. This is 'rented' to projects and for this initiative the charge would be $36,500 per annum. The project will also be allocated a share of the company's overheads, which in this case will be $24,500. It would be necessary to hold working capital of approximately $80,000 to service the project.

The company's required rate of return on its investments is 12%. Ignore Taxation.

(A) Required

Question (i) Prepare a statement of relevant cash flows for this project, explaining clearly the reasoning behind your decisions to exclude any of the above expenditures.

Question (ii) Calculate the net present value.