Option 1 – Operational improvements:
Undertake an extensive
review and modernisation of the production and operations. This option
will require the commissioning of the necessary engineering study and
will incur an immediate cost of £500,000. It will also require an
immediate investment in new machines of £25,000,000. This new machinery
is expected to have a useful economic life of 5 years and zero residual
value.
The modernisation of operations will result in the reduction of the production cost by £75 per scooter and the cost from product failure will be reduced by 90% but still will be increasing at 6% per year, in line with the increasing production and sales.
Option 2 – Production changes:
E-move
Ltd can change its current supplier of the electric motors. The new
motors will be more efficient and with some modifications in the
production line will save assembly costs. This second option requires an
additional immediate investment of £5,000,000, which will have useful
economic life 5 years and zero residual value. It will also result to an
increase of fixed production costs by £2,000,000 including
depreciation.
This investment will save £30 per scooter in assembly costs, which will obviously increase in line with the production and sales volume over the 5 years of the investment.
It is given that there are no taxes and inflation and only one of the two options can be undertaken.
Required:
(a) Estimate the Net Present Value and the Internal Rate of Return of Option 1 and show your calculations.
(b) Estimate the Net Present Value and the Internal Rate of Return of Option 2 and show your calculations.
(c)
Write a short report to the Board of e-move Ltd to explaining which
option should be undertaken and why. Include in this report discussion
of any relevant factors that might affect your calculations.
Your challenge is to make your points clear, and to develop short, convincing and factual arguments, using proper structure and reasoned discussion. Presenting your calculations clearly and precisely will enhance the overall quality of your report. Your report should not be longer than 2,000 words. The cover page, formulas, tables, reference list and any appendices do not count towards the overall word count.