The R&D department of a company has developed a new product with an expected life of six years.

The R&D department of a company has developed a new product with an expected life of six years. The manufacturing of the product will require investment of Rs 3 lakh. The following annual profit from the investment is expected:

    Selling price                                                                       25

    Less: Unit variable cost                                                               

             Materials                                        8                                  

             Labour                                           4                                  

             Overheads                                      3                         15      

             Contribution                                                             10      

    Sales revenue (30,000 units)                                     750,000      

    Less: Variable costs                                                  450,000      

    Contribution                                                              300,000      

    Less: Fixed costs

         (including depreciation Rs 50,000)    120,000                 

    Profit before tax                                                        180,000      

    Less: Tax at 50%                                                        90,000      

    Profit after tax                                                             90,000      

Assume that the company can charge depreciation on straight-line basis for tax purpose. If the company has a discount rate of 10 per cent, calculate the investment’s NPV. Identify the factors which are most critical to the decision. To answer this question, calculate the volume, selling price, unit variable cost, and cash outlay, at which the investment’s NPV would be zero, other things remaining the same.


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