QUESTION: 77

A company is considering investing $680,000 in a machine to manufacture a new product.
A consultant has been appointed to advise on the investment and the company is committed to paying $10,000 to the consultant in year 1, even if the project does not go ahead.

300,000 units of the new product will be produced and sold each year. Unit cost and revenue information based on this level of output is as follows.

60% of the overhead cost is variable. Of the remainder, 10% consists of allocated head office overheads.

The selling price will increase by 2% each year in line with inflation, beginning in year 2. Fixed price contracts mean that all unit costs will remain unaltered.

Taxation information:

· 100% first year allowance will be available for the purchase of the machinery.

· The taxation rate is 30% of taxable profits, payable in the year after that in which the liability arises.

For the purpose of deciding whether to proceed with the investment, what is the relevant cash flow in year 2?

$1,102,320
$1,099,320
$1,326,960
$1,288,800

Answer(s): A

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QUESTION: 78

A manufacturing company has just developed a new product and must now determine the most appropriate pricing strategy for its initial launch.

The product will initially be unique because it will include highly desirable features that no competitive product offers. Its development has involved substantial expenditure and the company wishes to recover this as soon as possible.

The product's uniqueness is expected to last for only six months before a competitor launches a similar product. It is expected that the competitor will avoid any significant development costs by reverse engineering the company's own product.

At that point, to remain competitive, the company must ensure that its selling price matches that of the competitor.

Which of the following pricing strategies would be most suitable for the initial launch of the company's product?

Market skimming
Penetration pricing
Dual pricing
Own label pricing

Answer(s): A

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QUESTION: 79

The net present value of the cost of operating a machine for the next 4 years is £6,340.
The discount rate used is 10%.

What is the equivalent annual cost and the present value of the cost in perpetuity of operating this machine?

Use discount factors to 3 decimal places.

Equivalent annual cost = £92,825
Present value of cost in perpetuity = £9,283
Equivalent annual cost = 9,283
Present value of cost in perpetuity = £92,825
Equivalent annual cost = £2,000
Present value of cost in perpetuity = £20,000
Equivalent annual cost = £20,000
Present value of cost in perpetuity = £2,000

Answer(s): C

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QUESTION: 80

A project is viable because it has a positive net present value (NPV).

Details of four of the input variables, together with the sensitivity of the viability of the project to a change in each one in isolation, are given below.

Which of the following statements is correct?

A 1% change in the initial investment will result in a change of 3% in the NPV.
The resale value at the end of the project is the most sensitive of the four variables.
If the incremental annual cash contributions reduce by more than 8% then the project will no longer be viable.
If the rate of taxation on profits increases to 40% then the project will no longer be viable.

Answer(s): C

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QUESTION: 77

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QUESTION: 80