Coca-Cola company is planning to develop another product
line for its customers. Feasibility report shows that the
project will purchase the factory building at a total cost of
$300,000 which will be done in three instalments as follows
30% first instalments in year 1, 40% year 2 and 30% in year
3. The project will also purchase machinery at a total cost of
$120,000, spread over three years starting from year one as
follows $20,000, $50,000 and $50,000. The project will also
purchase two vehicles, one vehicle in year 1 and the second
vehicle in year 3 at a cost of $20,000 per vehicle.
The project would produce 1200 tonnes of output in year 3,
1800 tonnes in year 4 and 1950 tonnes in each year 5 to
year 8. Raw materials required for producing relevant
amount of coca cola per year will be equivalent to 40% of the
amount of output produced in that particular year. Sales of
coca cola output would be 75% of total production in year 3,
85% in year 4, 90% in year 5 and 100% in years 6 – 8. The
difference between production and sales would be sold on
credit to customer at an increment of 2% from the direct
selling price of outputs per year. The company will benefit
from selling other products/by-products which will be
produced in the same quantities as the coca cola outputs
per year but will be sold at $5,000 per tonne through out the
project life. The report suggests that for the project tooperate profitably, a unit tonne of coca cola output should
directly sell (on cash) at $8000. Raw materials will be
purchased at a cost equivalent to 30% of the selling price of
a tone of outputs directly sold for each year of production
It is also estimated that operating costs are $50,000 for
labour and $25,000 for utilities per year. In addition, the
project will incur maintenance cost of machinery as follows;
1% of total machinery costs in Years 3 & 4; 3% of total
machinery costs from Year 5 onwards. Maintenance cost for
vehicles will be 20% from the first year of purchase on ward.
Assume the discount rate is 12%.
REQUIRED:
1. On the basis of the above information draw up a
Resource Flow for the project. You may make any
assumptions you like on aspects not covered in the text
above, but you must make the nature of your
assumptions clear.
2. Analyse the proposed project using appropriate
investment selection criteria and techniques and make
a recommendation on whether or not the project should
be accepted.