“Happy Your Self" ( HYS) Co. is evaluating an investment proposal to manufacture GB pen drives, which has performed well in test marketing trials conducted recently by the company’s research and development division. The following information relating to this investment proposal has now been prepared.
Initial investment GH¢ 2 million
Selling price (current price terms) GH¢ 20 per unit
Expected selling price inflation 3% per year
Variable operating costs (current price terms) GH¢ 8 per unit
Fixed operating costs (current price terms) GH¢ 170,000 per year
Expected operating cost inflation 4% per year
The research and development division has prepared the following demand forecast as a result of its test marketing trials. The forecast reflects expected technological change and its effect on the anticipated life-cycle of GB pen drives.
Year 1 2 3 4
Demand (units) 60,000 70,000 120,000 45,000
It is expected that all units of GB pen drives produced will be sold, in line with the company’s policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is expected at the end of four years, when production of GB pen drives is planned to end.
Required:
Determine the
relevant cash flows
to be used to appraise the proposal of the manufacture of the GB pen drive.