Your company is considering an investment project which will commence in January 2023. The budgeted initial investment: Accounting and Finance Case Study, NTU, Singapore

Your company is considering an investment project which will commence in January 2023. The budgeted initial investment is expected to be 5% of the company’s market capitalization as of 31 December 2022.  The initial investment is expected to be fully disbursed when the project commences in January 2023.

• This investment project involves the introduction of a new product and leverages its existing marketing channel. The manufacturing of this new product requires the company to invest in a new production line. The production line consists of a new set of equipment and is expected to last four years from the date it is ready for use, and then, because of no more demand for the product, will be scrapped.
• The new product is expected to generate an annual revenue of 10% of the current year’s revenue when the production line is ready for use. This amount is expected to increase in volume by 5% per annum after the first year of sales.
• Variable cost is estimated at 30% of revenue and incremental annual fixed cost is estimated at 10% of incremental revenue. Both costs will only begin when sales commence.
• Working capital requirements: Incremental working capital investment at the beginning of the year of sales will need to be 15% of revenue for that year throughout the four years and finally, 80% of this working capital investment is liquidated at the end of year 4 of sales.
• The depreciation method: The simplified straight-line method is used by this company, which is also allowable for tax reporting, over the new production line’s life of four years. It is assumed that the equipment will have no salvage value after four years.

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