Finance case (continue part one)-part two

Continue part one - Finance case

Notes:
1. Capital expenditure: $8 million for new machine and $2.4 million for a
warehouse extension. The full cost of the extension has been charged to this
project, although only half of the space is currently needed. Since the new
machine will be housed in an existing factory building, no charge has been
made for land and building.
2. Research and development: $1.82 million spent in 2007. This figure was
corrected for 10% inflation from the time of expenditure to date. Thus $1.82 x 1.1 = $2 million.
3. Working capital: initial investment in inventories.
4. Revenue: These figures assume sales of 2000 motors in 2009, 4000 in
2010, and 10,000 per year from 2011 through 2018. The initial unit price of $4,000 is forecasted to remain constant in real terms.
5. Operating cost: These include all direct and indirect costs. Indirect costs
(heat, light, power, fringe benefits, etc.)are assumed to be 200% of direct
labor costs. Operating costs per unit are forecasted to remain constant in real
terms at $2,000.
6. Overhead: Marketing and administrative costs, assumed equal to 10% of
revenue.
7. Depreciation: Straight-line for 10 years.
8. Interest: Charged on capital expenditure and working capital at ABC
current borrowing rate of 15%.
9. Income: Revenue less sum of research and development, operating costs,
overhead, depreciation, and interest.
10. Tax: 35% of income. However, income is negative in 2008. This loss is
carried forward and deducted from taxable income in 2010.
11. Net cash flow: Assumed equal to income less tax.
12. Net present value: NPV of net cash flow at a 15% discount rate.