Vamoose plc is a company based in the Teeside which manufactures components for the motorised  scooter and bicycle industry. Vamoose’s Research and Development unit has recently developed  an innovative new product for which there is considerable market demand. The production of this  new product represents a major shift in Vamoose’s strategic direction as a company. Subsequently,  the company is now planning to acquire a piece of equipment to manufacture the new product. The  equipment will cost £6,600,000 and is expected to last for 5 years with an estimated scrap value of  £2,300,000. Management expects to produce 160,000 units per annum (p.a.) of the new product,  which will be sold for £68 per unit in the first year. Production costs per unit (at current prices) are  as follows:  Materials: £28.50  Labour: £24.40  Materials are expected to inflate at 8.5% p.a. and labour is expected to inflate at 6.5% p.a. Fixed  overheads of the company currently amount to £1,370,000. These are not expected to increase as  a direct result of manufacturing the new product. The company expects to be able to increase the  selling price of the product by 9.5% p.a. An additional £760,000 of working capital will be required  at the start of the project. Other data are as follows:  Capital allowances: 20% reducing balance.  Tax: 20%, payable immediately  Cost of capital: 18%  Required:  a) Calculate the NPV and the IRR of the project and advise whether it should be accepted. Show  all workings.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Vamoose plc is a company based in the Teeside which manufactures components for the motorised 
scooter and bicycle industry. Vamoose’s Research and Development unit has recently developed 
an innovative new product for which there is considerable market demand. The production of this 
new product represents a major shift in Vamoose’s strategic direction as a company. Subsequently, 
the company is now planning to acquire a piece of equipment to manufacture the new product. The 
equipment will cost £6,600,000 and is expected to last for 5 years with an estimated scrap value of 
£2,300,000. Management expects to produce 160,000 units per annum (p.a.) of the new product, 
which will be sold for £68 per unit in the first year. Production costs per unit (at current prices) are 
as follows: 
Materials: £28.50 
Labour: £24.40 
Materials are expected to inflate at 8.5% p.a. and labour is expected to inflate at 6.5% p.a. Fixed 
overheads of the company currently amount to £1,370,000. These are not expected to increase as 
a direct result of manufacturing the new product. The company expects to be able to increase the 
selling price of the product by 9.5% p.a. An additional £760,000 of working capital will be required 
at the start of the project. Other data are as follows: 
Capital allowances: 20% reducing balance. 
Tax: 20%, payable immediately 
Cost of capital: 18% 
Required: 
a) Calculate the NPV and the IRR of the project and advise whether it should be accepted. Show 
all workings. 

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