Math Problem Solver

Jireh Uganda Ltd, manufacturers of fragrances, is listed on the Uganda Securities Exchange (USE) Following a research that revealed the marketability of a new perfume beautex, the company is evaluating the financial viability of undertaking an investment in the production of the product. The research cost incurred amounted to Ushs. 480,000. Production of beautexwill require purchase of new machinery at a cost of shs. 2,400,000 payable immediately. The machinery has a lifespan of four years after which it will be obsolete.

The production capacity of the machinery is 25,000 bottles of beautex per annum. It is expected that that the machinery will work to full capacity over its useful life.

Variable production cost per bottle of beautex is shs.32

Fixed production costs (excluding depreciation) will amount to shs.200,000 per annum.

The selling price per bottle of beautex is shs.80. It estimated that all bottles of beautex produced will be sold.

The company’s cost of capital is 15%.

Required:

(a) Evaluate the following techniques of investment appraisal in investment decision making.

(i) Net Present Value (NPV)

(ii) Internal Rate of Return (IRR) (2 marks)

(b) Using Net Present Value (NPV) technique, advise whether the management of Jireh Uganda should produce beautex based on the information above. (8)

(c) Using Internal Rate of Return (IRR) technique, assess the viability of the above investment if the selling price, variable production costs and fixed production costs of beautex increase by 5%, 10% and 6% per annum respectively over the four-year period. (10)