Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

problem 1: Berick Ltd: A Capital Expenditure Decision

Berick Ltd is a relatively small engineering company which manages to compete effectively with larger companies through adapting to changing market requirements and specialising in the innovative products with the limited markets. The products are sold to a huge range of companies; however most of its sales are to companies in oil industry. On this basis it has maintained a high rate of return on the capital employed in relation to the engineering sector as an entire. The newest product to be developed, a high pressure valve, has completed its testing stage and the company now has to decide on whether or not to invest in a production facility and a marketing programme.

The work already undertaken on product has cost £1.3 million and it is anticipated which some further development work will cost a further £0.2 million. It is estimated that an investment of £9.00 million will be essential in plant and machinery. This expenditure can be written off (capital allowances) for tax purposes on a straight-line basis over the product’s expected six year life. It is anticipated that the resale value of equipment will be about £2.00 million at the end of the six years. The outlay would have been larger; however the company already owns some finishing equipment that will be needed. This was previously employed in the manufacture of another product that is no longer being produced. It is fully depreciated for tax purposes and could be sold today for £180,000. If employed for the next six years it will have no re-sale value.

The production facility would be located in one of company’s factories with spare capacity accessible. It will occupy 15 per cent of the factory’s space. The company has no alternative uses accessible for this space for the foreseeable future and has further spare capacity accessible in other factories. The product will be charged £50,000 per annum for this space by the company’s management accounting system, though only 20 per cent of this figure will stem from incremental costs resulting from heating and lighting. The fixed costs directly attributable to production are expected to be £ 90,000 per annum. Each product sold by the company is also allocated a general overhead charge equal to 10 per cent of the revenues it generates. This allocation is made by the company’s accountant to cover head office expenses.

The selling price is expected to be set at £38.00 per unit and it is anticipated that sales in first year will be about 150,000 units, rising to 200,000 in year two, and staying at this level for the subsequent four years. The introduction of the product would need a marketing campaign that will cost £150,000. As a result of the rapid technological development in area a six year product life is all that can be expected.

The direct manufacturing costs are expected to be £12.00 per unit. The company will require holding stocks of product at start of each year equal to 25 per cent of the sales expected in the year to come. The raise in debtors as a result of introducing the product will be just about offset by the increase in creditors. The company needs a rate of return of 14 per cent on investments of this nature, and the tax rate is 40 percent.

1) Verify the investment’s net present value and the internal rate of return. All key assumptions should be specified and describeed.
2) Undertake a sensitivity analysis for the assumed price and volume of expected sales and interpret your results carefully.
3) Give a brief general discussion of the potential risks associated with this investment

problem 2)

Prices of Calls and Puts Options the shares of Marks & Spencer

660_share price.jpg

1) Elucidate carefully why the November calls are trading at higher prices than the September calls.
2) Draw a diagram illustrating a straddle, using calls and puts expiring in November and an exercise price of 210. Elucidate the circumstances in which an investor may consider it worthwhile to invest in a straddle.
3) Develop a covered call using the data provided and comment on nature of the payoffs produced and the potential uses of the strategy

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91095

Have any Question? 


Related Questions in Basic Finance

You are the senior assistant to the chairman of the board

You are the senior assistant to the Chairman of the Board of Hi-Teck Inc. In order to attract the chief operating officer of his choice from another firm, the Chairman offers the following incentive supplement to her bas ...

Cost estimation and budgetingan important aspect of cost

Cost Estimation and Budgeting An important aspect of cost budgeting is personnel. A current professional issue in the engineering field is companies using contract engineers like employees but refusing to actually make t ...

There are basically 5 categories of financial statement

There are basically 5 categories of financial statement analysis that is employed to assess the health of companies related to their financial performance. They are generally classified as liquidity, efficiency, debt, pr ...

Choose a conceptual variable that can be considered to be a

Choose a conceptual variable that can be considered to be a trait of interest to you, and (after conducting a literature review) create a 20-item Likert scale to assess it. Administer the scale to at least 20 people. Com ...

1 go to wwwfdicgovbankindividualonlinesafehtml and read the

1. Go to www.fdic.gov/bank/individual/online/safe.html and read the article on "Safe Internet Banking." List three steps that you will take or are taking to ensure that your Internet banking is safe. 2. a. Conduct an onl ...

1 what is the importance for an individual of understanding

1. What is the importance for an individual of understanding time value of money concepts? For a corporate manager? Under what circumstance would the time value of money be irrelevant? 2. From a time value of money persp ...

Explain why end users who conduct their risk management

Explain why end users, who conduct their risk management operations in the treasury department, should not require the treasury department to be a profit center ? Distinguish the typical objectives of a dealer engaging i ...

1 what is a standby commitment when and why is it used2

1. What is a standby commitment? When and why is it used? 2. What is a mini-perm or bullet loan? When and why is this type of loan used? 3. Third-party lenders sometimes provide gap financing for project developments. Wh ...

In 2009 daryl bought a life insurance policy on his life

In 2009, Daryl bought a life insurance policy on his life with a death benefit of $200,000. He named his wife Melanie the beneficiary of this policy. In 2012, Daryl created an ILIT with Melanie as beneficiary, and transf ...

1 show that in the atsp formulation the connectivity

1. Show that, in the ATSP formulation, the connectivity constraints (6.61) and the subtour elimination constraints (6.62) are equivalent. 2. Show that the number of vertices of odd degree in a graph is even. 3. Let G = ( ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro