Table of Contents
1.0 Executive summary
2.0 Input & output
3.0 Calculations of original scheme and assumptions
3.1 ARR calculations
3.2 PP calculations
3.3 NPV calculations
3.4 IRR calculations
4.0 Sensitivity analysis
4.1. Four appraisal technical methods combined to evaluate the project
4.2 Project evaluation analysis and comparison
4.3 Select the best choice
4.4 Several considerations of evaluating this project
1.0 Executive Summary
The GTV Manufacturing Company is considering a proposal to manufacture a new product, the proposal has been coded "Project X". Before starting up manufacturing, an evaluation report is needed to let GTV management make sure that the investment will be profitable and acceptable.
The investment required to produce the new product consists of an initial of outlay on manufacturing equipment of $660,000. This will provide an annual production capacity of 250,000 units. Additional production capacity can be provided when necessary by undertaking a major overhaul and installing bigger components which can increase annual capacity by 50,000 units (each installation).
Each installation of additional components is estimated to cost $60,000 (per 50,000 unit expansion). After production exceeds 250,000 units from forth year additional space will also be required. As a result, alternations to existing buildings will need to be made at that time at an estimated cost of $100,000.
An important part of this screening process is to ensure that the business uses appropriate methods of evaluation. In the calculations and assumptions part there are basically four methods to evaluate the opportunities, they are: accounting rate of return (ARR), payback period (PP), net present value (NPV), internal rate of return (IRR). ARR is a measure for profitability that many believe is the correct way to evaluate investment; the PP approach has certain advantages, it is quick and easy to calculate and can be easily...