Part-AScenario:Midal cables limited, is currently considering the launch of anew product. A market...Part-AScenario:Midal cables...

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Accounting

Part-A
Scenario:
Midal cables limited, is currently considering the launch of anew product. A market survey was recently commissioned to assessthe likely demand for the product and this showed that the producthas an expected life of four years. The survey cost $30,000 andthis is due for payment in four months’ time. On the basis of thesurvey information as well as internal management accountinginformation relating to costs, the assistant accountant preparedthe following profit forecasts for the product.
Year
1
2
3
4
$'000
$'000
$'000
$'000
Sales
180
200
160
120
Cost of sales
(115)
(140)
(110)
(85)
Gross profit
65
60
50
35
Variable overheads
(27)
(30)
(24)
(18)
Fixed overheads
(25)
(25)
(25)
(25
Market survey written off
(30)
Net profit/(loss)
(17)
5
1
(8)

These profit forecasts were viewed with disappointment by thedirectors and there was a general feeling that the new productshould not be launched. The Chief Executive pointed out that theproduct achieved profits in only two years of its four-year lifeand that over the four-year period as a whole, a net loss wasexpected. However, before a meeting that had been arranged todecide formally the future of the product, the following additionalinformation became available:
The new product will require the use of an existing machine.This has a written down value of$80,000 but could be sold for$70,000 immediately if the new product is not launched. If theproduct is launched, it will be sold at the end of the four-yearperiod for $10,000.
Additional working capital of $20,000 will be requiredimmediately and will be needed over the four-year period. It willbe released at the end of the period.
The fixed overheads include a figure of $15,000 per year fordepreciation of the machine and $5,000 per year for there-allocation of existing overheads of the business.
The company has a cost of capital of 10%.
Ignore taxation.
Required
Use integrated financial software you are familiar with andperform the task below. For example, you may use excelspreadsheet for calculation and presentation of cash flowand Microsoft word to explain the phenomenon.
Calculate the incremental cash flows arising from a decision tolaunch the product.
Calculate the approximate internal rate of return of theproduct.
Explain, with reasons, whether or not the product should belaunched. (50-100 words)

Answer & Explanation Solved by verified expert

3.9 Ratings (573 Votes)

Incremental cash flow All amount 000 Year 1 2 3 4 Total Net profit Loss 17 5 1 8 19 Add Depreciation 15 15 15 15 60 Add Reallocation of overheads 5 5 5 5 20 3 25 21 12 61 Less Working capital 20 20 17 25 21 12 41 Add written off market survey cost 30 Add Working capital to be recovered 20 20 Add See Answer

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Transcribed Image Text

In: AccountingPart-AScenario:Midal cables limited, is currently considering the launch of anew product. A market...Part-AScenario:Midal cables limited, is currently considering the launch of anew product. A market survey was recently commissioned to assessthe likely demand for the product and this showed that the producthas an expected life of four years. The survey cost $30,000 andthis is due for payment in four months’ time. On the basis of thesurvey information as well as internal management accountinginformation relating to costs, the assistant accountant preparedthe following profit forecasts for the product.Year1234$'000$'000$'000$'000Sales180200160120Cost of sales(115)(140)(110)(85)Gross profit65605035Variable overheads(27)(30)(24)(18)Fixed overheads(25)(25)(25)(25Market survey written off(30)Net profit/(loss)(17)51(8) These profit forecasts were viewed with disappointment by thedirectors and there was a general feeling that the new productshould not be launched. The Chief Executive pointed out that theproduct achieved profits in only two years of its four-year lifeand that over the four-year period as a whole, a net loss wasexpected. However, before a meeting that had been arranged todecide formally the future of the product, the following additionalinformation became available:The new product will require the use of an existing machine.This has a written down value of$80,000 but could be sold for$70,000 immediately if the new product is not launched. If theproduct is launched, it will be sold at the end of the four-yearperiod for $10,000.Additional working capital of $20,000 will be requiredimmediately and will be needed over the four-year period. It willbe released at the end of the period.The fixed overheads include a figure of $15,000 per year fordepreciation of the machine and $5,000 per year for there-allocation of existing overheads of the business.The company has a cost of capital of 10%.Ignore taxation.RequiredUse integrated financial software you are familiar with andperform the task below. For example, you may use excelspreadsheet for calculation and presentation of cash flowand Microsoft word to explain the phenomenon.Calculate the incremental cash flows arising from a decision tolaunch the product. Calculate the approximate internal rate of return of theproduct.Explain, with reasons, whether or not the product should belaunched. (50-100 words)

Year	1	2	3	4
	$'000	$'000	$'000	$'000
Sales	180	200	160	120
Cost of sales	(115)	(140)	(110)	(85)
Gross profit	65	60	50	35
Variable overheads	(27)	(30)	(24)	(18)
Fixed overheads	(25)	(25)	(25)	(25
Market survey written off	(30)
Net profit/(loss)	(17)	5	1	(8)