Your Company Limited (Your Company) is well known chocolate manufacturer. There is the opportunity for Your Company to enter into new overseas market that is eager for Australian chocolates. To assist in understanding this opportunity you have commissioned a $250,000 report into the viability of a new machine that will allow for higher levels of production.
The new project will require Your Company to locate the new machine on a floor of their building that is currently being rented out to a separate business. The rent that Your Company currently receives is $104,000 a year. Once the project is complete, the space will become available again and the business will seek a new tenant to rent that space.
There is also an existing machine from a previous project that has a written down value of $0. You were recently offered $5,000 to sell this asset but you believe that it can also be used in the new project. At the end of this project the machine will be discarded.
The new machine has been valued at $100,000 and a further $20,000 is required for the installation. The machine is expected to meet Your Companys needs for 3 years but the Taxation Office advises the machine has an operational life of 4 years.
With increased output Your Company needs additional stock of $5,000. Initial advertising costs are expected to be $10,000 and the existing advertising budget will change from $20,000 to $30,000 per year. One less staff member is needed due to automation and salaries will change from $75,000 to $40,000 per year.
Revenue related to this project is expected to be $300,000 in the first year and grow by 10% each year for the remainder of the project. Material costs are expected to be 20% of sales in each year.
It is believed that the new higher quality product will reduce existing sales by $6,000 per year and related costs will fall by $2,000 per year.
At the end of the project the new machine is to be sold for $45,000.
Cost of capital is 11% and tax rate of 30% to apply. You are required to complete a capital budget to determine if this project is worth completing.
