Prepare a brief report for the Board of Directors which evaluates the financial merits of this investment opportunity.
Your report should address the following detailed requirements:
Perform a financial evaluation of this investment opportunity. (A table highlighting the relevant cash flows together with detailed workings to support your net present value calculation should be presented in an appendix).
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Using the table below, explain your reasoning for the treatment of the items specifically referred to in the narrative above as ‘relevant cash flows’ or otherwise. (This table should be included in your main report and not in an appendix).
Item Relevant Cash Flow? (Yes or No) Rationale for Treatment as Relevant or Otherwise
1 Cost of R & D Project 11 of $1.5m
2 Cost of R&D Project 20 of $300,000
3 Cost of R&D Project 21 of $1.3m
4 Amortisation of R&D Project Costs
5 Cost of market research study of $20,000
6 Cost of technical feasibility study of $75,000
7 Factory rental income of $30,000 per annum
8 Increase in fixed overheads of $25,000 per annum
9 Cost of additional staff member to act as Product Manager
10 Allowance for general fixed costs of 10% of revenue per annum
Identify and briefly explain two non-financial considerations which you believe should be taken into account before a final decision is made.
Provide a clear recommendation to the Board as to whether this project should go ahead.
Provide a list of any assumptions you have made in an appendix.
