Maurice Tutor

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    Argosy University/ Phoniex University/
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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 20 Jan 2018 My Price 10.00

Darla Kinsett

Darla Kinsett is evaluating the purchase of a freeze dryer, which will allow it to move from the supply of raw food to local supermarkets into the more lucrative frozen foods market. Packets of frozen food will be sold in boxes of eight and the following information applies to each box:

 

£ per box

Selling price

9.7

Packaging and labour

2.2

Frozen food and processing

4.8

The selling price and cost of the frozen food are expected to increase by 6 per cent peryear, while packaging and labour costs are expected to increase by 5 per cent per year. Investment in working capital will increase by £90 000 during the first year. The freeze dryer will have a useful life of five years before being scrapped, the net cost of disposal being £18 000. Sales in the first year are expected to be 80000 boxes, but sales in the second and subsequent years will be 110000 boxes.

The manufacturer of the freeze dryer, in order to encourage Darla Kinsett to go ahead with the deal, has offered to defer payment of part of the purchase price. The total cost of the freeze dryer is £1m and the offer is for 60 per cent to be paid initially, with the remaining 40 per cent to be paid one year later. The company’s nominal cost of capital is 14 per cent. Ignore taxation.

(a) Assess whether Darla Kinsett should invest in the freeze dryer.

(b) Explain your choice of discount rate in your answer to part (a).

Answers

Maurice Tutor
(5)
Status NEW Posted 20 Jan 2018 09:01 PM My Price 10.00

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