COR167 Managing Your Personal Finances

You are the financial controller of Webster Plc, a manufacturer of massage equipment (“the Soother”) for domestic use, serving the UK and export markets. The company sells through a network of independent distributors both home and abroad.

The managing director has asked for your help in connection with a long-term investment decision:

Webster Plc is considering purchasing a new production machine. At present, it uses an old machine which can produce 8,000 “soothers” per week. This machine could be replaced with a new machine, which can produce 20,000 “soothers” per week. The new machine will cost £400,000. Removing the old machine and preparing the area for the new machine will cost €20,000. The new machine will occupy additional space in the factory which was planned to be rented out for £15,000 per annum payable in advance each year.

The company has already spent £40,000 on a market study to ascertain how many more“soothers” can be sold. Demand is expected to be 12,000 units per week for three years, after which a newer product will replace the “soother”. In the fourth year, the new machine would be sold for € 50,000. This sale is not expected to take place until later in the fourth year. Each “soother” sells for £7.00 and has a contribution to sales ratio of 0.2 per unit. The company works for 48 weeks in the year. Webster Plc normally expects a payback within two years and it’s cost of capital is 10% per annum.

As a report to management,

a) Evaluate the acceptability of the investment project using both the Payback and NPV methods. Clearly show your workings and separate conclusions for each method (500 words equivalent).

b) Evaluate the merits and de-merits of each method, referring to your answers above and suggest the context where each method might be appropriate (750 words).

c) Briefly discuss techniques to assess and manage risk and uncertainty in the investment appraisal process and relate the discussion to an industry of your choosing (750 words).