When product presenters meet a customer for the first time, they should spend some ti

well in test marketing trials conducted recently by the company’s research and development division. The following information relating to this investment proposal has now been prepared.

Initial investment $2 million

Selling price (current price terms) $20 per unit

Expected selling price inflation 3% per year

Variable operating costs (current price terms) $8 per unit

Fixed operating costs (current price terms) $170,000 per year

Expected operating cost inflation 4% per year

The research and development division has prepared the following demand forecast as a result of its test marketing trials. The forecast reflects expected technological change and its effect on the anticipated life-cycle of Product W33.

It is expected that all units of Product W33 produced will be sold, in line with the company’s policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is expected at the end of four years, when production of Product W33 is planned to end. For investment appraisal purposes, PV Co uses a nominal (money) discount rate of 10% per year and a target return on capital employed of 30% per year. Ignore taxation.

Required:

(a) Identify and explain the key stages in the capital investment decision-making process, and the role of

investment appraisal in this process. (7 marks)

(b) Calculate the following values for the investment proposal:

(i) net present value;

(ii) internal rate of return;

(iii) return on capital employed (accounting rate of return) based on average investment; and

(iv) discounted payback period. (13 marks)

(c) Discuss your findings in each section of (b) above and advise whether the investment proposal is financially acceptable. (5 marks)

ft Designs Ltd. David has

spotted an opportunity for a new type of gift packaging. This uses a new process to make waterproof cardboard and

then shapes and cuts the card in such a way to produce a container or vase for holding cut flowers. The containers

can be stored flat and in bulk and then simply squeezed to create the flowerpot into which flowers and water are then

put. The potential market for the product is huge. In the UK hospitals alone there are 200,000 bunches of flowers

bought each year for patients. David’s innovative product does away with the need for hospitals to provide and store

glass vases. The paper vases are simple, safe and hygienic. He has also identified two other potential markets; firstly,

the market for fresh flowers supplied by florists and secondly, the corporate gift market where clients such as car

dealers present a new owner with an expensive bunch of flowers when the customer takes delivery of a new car. The

vase can be printed using a customer’s design and logo and creates an opportunity for real differentiation and impact

at sales conferences and other high profile PR events.

David anticipates a rapid growth in Gift Designs as its products become known and appreciated. The key question is

how quickly the company should grow and the types of funding needed to support its growth and development. The

initial financial demands of the business have been quite modest but David has estimated that the business needs

￡500K to support its development over the next two years and is uncertain as to the types of funding best suited to

a new business as it looks to grow rapidly. He understands that business risk and financial risk is not the same thing

and is looking for advice on how he should organise the funding of the business. He is also aware of the need to avoid

reliance on friends and family for funding and to broaden the financial support for the business. Clearly the funding

required would also be affected by the activities David decides to carry out himself and those activities better provided

by external suppliers.

Required:

(a) Provide David with a short report on the key issues he should take into account when developing a strategy

for funding Gift Designs’ growth and development. (10 marks)

A. when the order is placed

B. when the product is shipped

C. when the product is delivered

D. when the product is installed

A.period the cash is collected for a product sold on account

B.future period when the cost of repairing the product is paid

C.period of the sale of the product

D.future period when the product is repaired or replaced

When (ask) ______ about the advertising campaign of the new product, the manager said it was a great success.

The cost of a product warranty should be included as an expense in the ()

A. period the cash is collected for a product sold on account

B. future period when the cost of repairing the product is paid

C. period of the sale of the product

D. future period when the product is repaired or replaced

All the members of the club were present when the Chairman (elect) ______ last week.

causes _________ to its users.

A.damage

B.death

C.anger

D.injury

A.general

B.usual

C.ordinary

D.common