A manufacturer of small power tools is faced with foreign competition, which necessitates that they either modify (automate) their existing product or abandon it and market a new product. Regardless of which course of action they follow; they will have the opportunity to drop or raise prices if the company experiences a low initial demand.

Task 1 (Capital Investment Appraisal)
Sohar Chemicals LLC, a chemical manufacturing industry which is based in Liwa has a plan to expand its product range by starting a new unit. The company considers a cost of capital of 7% on all its investments. The company has three investment proposals in consideration.
Proposal A (Ammonia Plant):
Capital Investment: 30000 RO
Proposal B (Acetic Acid Plant): Capital Investment: 35000 RO
Proposal C (Sulphuric Acid Plant): Capital Investment: 42000 RO
The expected cashflows of the three projects for a period of 10 years are given in the Table T1.

  1. Determine
  2. i) The Pay Back Period (PBP) of the three project proposals ii) The Average Rate of Return (ARR) of the three project proposals iii) The Net Present Value (NPV) of the three project proposals iv) The Profitability Index (PI) of the three project proposals
  3. v) The Internal Rate of Return (IRR) of the three project proposals

 
 

  1. Appraise the three proposals based on the above criteria and conclude which of the three proposals is the best for the company. Justify your answer with proper reasons.

Table T1 : Expected cash flows of the three projects

Year Cash Flow of Project A (in RO) Cash Flow of Project B (in RO) Cash Flow of Project C (in RO)
1 7200 9200 8200
2 7600 9740 9030
3 7930 10240 9860
4 8250 10710 10700
5 8530 11210 11510
6 8930 11660 12300
7 9330 12160 13090
8 9610 12700 13900
9 10030 13150 14680
10 10460 13610 15490
 
 

 
 
Task 2 (Decision Tree)
A manufacturer of small power tools is faced with foreign competition, which necessitates that they either modify (automate) their existing product or abandon it and market a new product. Regardless of which course of action they follow; they will have the opportunity to drop or raise prices if the company experiences a low initial demand.
Table 2A: Estimates between two alternatives

Alternative Modify product New product
Level of demand Low High Low High
Probability 0.3 0.7 0.6 0.4
Payoff (RO) 50,000 70,000

Table 2B: Estimates when demand for both alternatives are “Low”

Items Modify product (if low initial demand) New product
(if low initial demand)
Drop price Raise price Drop price Raise price
Level of demand Low High Low High Low High Low High
Probability 0.4 0.6 0.7 0.3 0.2 0.8 0.8 0.2
Payoff (RO) 40,000 160,000 50,000 200,000 40,000 120,000 60,000 330,000
  1. Draw the Decision Tree for the above situation.

 

  1. ii) Determine the Expected Monetary Value (EMV) for each alternative and suggest what decision should the manufacturer take.

 
 
 
 
 
 
 
Task 3 : (Depreciation
Swift Aerospace purchased a new aircraft engine diagnostics equipment for its maintenance support facility in France. The installed cost of the equipment was RO 65,000 with a depreciable life of 5 years and an estimated 8% salvage. Determine the following

  1. Straight Line (SL) depreciation and book value schedule
  2. Double Declining Balance (DDB) depreciation and book value schedule.
  3. MACRS depreciation and book value schedule.
  4. Sinking Fund depreciation and book value schedule, if interest is calculated at 10%.
  5. An Excel xy scatter chart to plot the book value curves for all four schedules
Component Description
1 Problem background
(Comprehensive presentation of the problem mentioned in the task.)
2 Discussion, analysis, and recommendation
(Comprehensive discussion and in-depth analysis of the issues.)
4 Calculations, graphical presentation, diagrams, and analysis
(Accuracy and clearness of calculations, significant graphs and diagrams, and indepth analysis)
5 English language, writing style, and references
(Overall format and style, spelling and grammar mistakes, and standard referencing style)

Referencing
Harvard Referencing (CCE Style) First Edition 2013 should be followed for both in-text and listing references. This     downloadable document can             be        found   in         our       NU-CoE portal at: http://coeportal.nu.edu.om/member/contentdetails.aspx?cid=693
 
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