Sigma Company produces high-quality PCs using the just-in-time (JIT) production method. The market has grown significantly overthe pastfew years and is expected to grow continuously. They are planning to launch a new model called “Epic”. The introduction of Epic will have no impact on sales of existing models as it is expected to appeal to a different segment of themarket. The company has already spent Rs.2 million on marketing the new model further requires an investment of Rs.20 million in production equipment. The project has a life of five years and the depreciation is calculated using the straight-line method. Sales and production of the Epic over its lifecycle are expected to be as follows. Year 01 02 03 04 05 Units of sales 200 400 500 650 800 The selling price in Year 1 and Year 2 will be Rs. 50,000 per unit. The selling price will be reduced to Rs. 40,000 from year 3. The total variable cost of the Epic, including labour, materials, and variable overhead costsis estimated to be Rs.20,000 per unit and this is expected to remain constant throughout the life of the project. Fixed overheads are expected to be Rs.8 million per annum (including depreciation charges) and remain constant throughout the project. Additionally, working capital of Rs.6 million will be required at the start of the project. Other information A cost of capital of 12% per annum is used to evaluate projects of this type. Ignore inflation. You are required: 1. Calculate the net present value (NPV). 2. Calculate the internal rate of return (IRR) of this project. 3. Calculate the NBIR of this project. 4. Calculate the payback period for the Epic project. 5. Write a report (not less than 300 words) on the feasibility of introducing new model by analyzing the answers you got for questions (1), (2) and (3).
Sigma Company produces high-quality PCs using the just-in-time (JIT) production method. The market has grown significantly overthe pastfew years and is expected to grow continuously. They are planning to launch a new model called “Epic”. The introduction of Epic will have no impact on sales of existing models as it is expected to appeal to a different segment of themarket. The company has already spent Rs.2 million on marketing the new model further requires an investment of Rs.20 million in production equipment. The project has a life of five years and the
Year 01 02 03 04 05
Units of sales 200 400 500 650 800
The selling price in Year 1 and Year 2 will be Rs. 50,000 per unit. The selling price will be reduced to Rs. 40,000 from year 3. The total variable cost of the Epic, including labour, materials, and variable overhead costsis estimated to be Rs.20,000 per unit and this is expected to remain constant throughout the life of the project. Fixed overheads are expected to be Rs.8 million per annum (including depreciation charges) and remain
constant throughout the project.
Additionally, working capital of Rs.6 million will be required at the start of the project.
Other information
A cost of capital of 12% per annum is used to evaluate projects of this type. Ignore inflation.
You are required:
1. Calculate the
2. Calculate the
3. Calculate the NBIR of this project.
4. Calculate the payback period for the Epic project.
5. Write a report (not less than 300 words) on the feasibility of introducing new model by analyzing the answers you got for questions (1), (2) and (3).
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