Question

A software provider buys blank Bluray DVDs at $550 per hundred and currently uses 2 million DVDs per year. The manager believes that it may be cheaper to make the DVDs rather than buy them. Direct production costs (labour, materials, fuel) are estimated at $2.50 per DVD. The equipment needed would cost $3 million. The equipment should last for 15 years, provided it is overhauled every 5 years at a cost of $250 000 each time. The operation will require additional current assets of $400 000. The company's required rate of return is 12 per cent. Evaluate the proposal.

Answer 1

Savngs per CD = (5.50-2.50)			3
Number of Cds			2000000
Annual savings				6000000
Multiply: Annuity PVF at 12% for 15yrs				6.81086
Present value of cash flows					40865160
Present value of WC released (400000*0.182696)					73078.4
Total Inflows					40938238.4
Less: Outflows:
Initial Investment				-3000000
WC investment:				-400000
PV of Overhauling at end of 5yr				-141857
	(250000*0.567427)
PV f Overhaling at end of 10th yr				-80493.3
	(250000*0.321973)
Total Outflows					-3622350
Net Present value					37315888.4
Yes, the proposal is acceptable