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Analysis: Since NPV of the Project is positive, it is suggested to accept the Project Illustration 20: X Ltd. has for some years manufactured a product called C which is used as a component in a variety of electrical items. Although the product C is in demand, the technology of the design is becoming 58 obsolete. The company has developed a new product D which is based on new technology The management of X Ltd. is considering whether to continue production of C or discontinue the C and start production of D. The company do not have the resources to produce both the products. if C is produced, units Sales in year 1 are forecasted to be 24,000 but declining by 4,000 units in each subsequent year. Additional equipment costing Rs. 70,000 must be purchased now if production of C is to continue If D produced, then unit sales in year 1 are forecasted to be 6,000 but after that the sales will increase rapidly. Additional equipment costing Rs. 6, 20,000 should be purchased now if production of Dis to start Relevant details of the two products are as follows: (Rs.) D Variable cost per unit 25 50 Selling price per unit 55 105 The company appraises investments using 12% per annum compound cost of Money and ignores cash flows beyond five year from the start of investment. (a) Advise the company on the minimum annual growth in units sales of D needed to justify starting production of now. Support your answer with financial evaluation. (b) Advise management of the number of years to which its investment appraisal time horizon (Currently five years) would have to be extended in order to justify starting production D now if the forecast annual increase in D sales is 2,800 units. P. V of Re. 1 at 12% discount are as follows

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