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Case Study (100%) MOD006089

Benetton Plc is an established manufacturer and retailer of industrial water recycling equipment for commercial outlets such as cafes and restaurants. They supply equipment across the United Kingdom.

It is company policy that before final approval is granted for any new products, a full financial analysis of the proposed project must take place.

A new product calledClear Wateris being proposed. TheClear Waterproject is about to be evaluated and the following projections have been prepared:

Clear Watermachines will be leased to outlets for a fixed term of five years at £2,500 per machine per year. 50 outlets have already registered their interest in leasing aClear Watermachine. At the end of the five years, the outlet will have the opportunity to purchase the machine for £1,675. It is expected that 40 of the outlets will take up this offer. The remaining machines will be donated to shelters for the homeless.

The annual lease covers maintenance and service charges. Each machine will be serviced three times a year byPure WaterPlc engineers. Each visit to an outlet takes approximately two hours and costs Benetton £140. In addition, in the case of a fault developing, an outlet can call out an engineer. Approximately 45 fault call outs a year are expected and each call out costs £70.

The investment in 50Clear Watermachines will cost £165,000.

In additionPure WaterPLC will incur fixed costs specific to theClear Waterproject of £15,500 per annum and in accordance with policy, the project will also incur an annual charge equivalent to 25% of its direct costs to cover general fixed overheads of the business.

The company’s cost of capital is 12%.

Required:

Part A

a)Calculate the payback period for the project.
10 marks

b)Calculate the Net Present Value (NPV) on the project.
10 marks

c)Calculate the Internal Rate of Return (IRR) of the project
10 marks

c)Advise the Board on whether Benetton Plc should undertake the project. Support your answer with data from parts a) and b) above.
600 words15 marks

d)Evaluate the strengths and weaknesses of the investment appraisal techniques you used in the decision-making process.
700 words 15 marks

Part B

a)Cost and cost behaviour is a very important aspect of management decision making- In the light of the above statement, you are required to discuss cost and cost behaviour impacts on the preparation ofan organisation’s budget
600words 20 marks

b)
Break-even-analysisis an important tool in management decision making, you are required to discuss how break-even- analysis can be used to support management decision making in the preparation of the organisation’s budget
600 words20 marks

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