NOTE: Disregard VAT in this exercise. Based on previous experience, a company has prepared additional rates for the indi
Posted: Wed Mar 09, 2022 8:12 am
NOTE: Disregard VAT in this exercise.
Based on previous experience, a company has prepared additional
rates for the indirect variable costs in a production line:
- Material department: 25% of direct material
- Manufacturing department: 60% of direct salary
- Sales / administration costs: 10% of manufacturing extra
cost
a) Set up a contribution calculation for a new order that is
expected to consume NOK 30,000 in direct material costs and NOK
40,000 in direct labor costs.
The company has received a request from a potential customer to
deliver four orders as in a) pr. years for the next three years.
The price / income is set at NOK 170,000 per. order. This
production will in that case entail a need for investments in a
machine of NOK 300,000. The machine is expected to have a scrap
value of NOK 20,000 after three years. These orders will also
entail increased fixed, payable costs of NOK 100,000 per. year. The
variable costs from a) are also payable.
b) Set up the cash flows for this project from and including
year 0 up to and including year 3.
The company has a completely different investment project,
«Bravo», where the following net cash flows over 3 years are
budgeted:
Year 0: -175,000 Year 1: 55,000 Year 2: 75,000 Year 3:
105,000
In the rest of this assignment, you will use the cash flow for
"Bravo" reproduced above here when you make your calculations.
c) Calculate the net present value of project «Bravo» and
comment on the profitability when the required rate of return /
calculation interest rate is 10%.
d) Give a brief description of other methods for assessing the
profitability of an investment project
e) If you are going to choose between two mutually exclusive
investment projects, which analysis method should you choose?
Justify the answer.
Based on previous experience, a company has prepared additional
rates for the indirect variable costs in a production line:
- Material department: 25% of direct material
- Manufacturing department: 60% of direct salary
- Sales / administration costs: 10% of manufacturing extra
cost
a) Set up a contribution calculation for a new order that is
expected to consume NOK 30,000 in direct material costs and NOK
40,000 in direct labor costs.
The company has received a request from a potential customer to
deliver four orders as in a) pr. years for the next three years.
The price / income is set at NOK 170,000 per. order. This
production will in that case entail a need for investments in a
machine of NOK 300,000. The machine is expected to have a scrap
value of NOK 20,000 after three years. These orders will also
entail increased fixed, payable costs of NOK 100,000 per. year. The
variable costs from a) are also payable.
b) Set up the cash flows for this project from and including
year 0 up to and including year 3.
The company has a completely different investment project,
«Bravo», where the following net cash flows over 3 years are
budgeted:
Year 0: -175,000 Year 1: 55,000 Year 2: 75,000 Year 3:
105,000
In the rest of this assignment, you will use the cash flow for
"Bravo" reproduced above here when you make your calculations.
c) Calculate the net present value of project «Bravo» and
comment on the profitability when the required rate of return /
calculation interest rate is 10%.
d) Give a brief description of other methods for assessing the
profitability of an investment project
e) If you are going to choose between two mutually exclusive
investment projects, which analysis method should you choose?
Justify the answer.