Question

e)   The marketing director has given the management accountant some estimates on which to base her calculations for the launch of a shower gel (see Tables MA.4 and MA.5). She forecasts that they could sell 350,000 bottles in the first year, with growth of 10% per annum thereafter. She would expect to adopt a penetrating price strategy initially, with prices at £2 per bottle, but hopes to increase prices by 2% every year after that. She proposes to support the new shower gel with promotions costing £45,000 per year. Distribution costs are expected to be in line with existing products. By calculating the net present value over the next five years using a discount rate of 5%, advise the board whether they should invest £250,000 in equipment for this project. You should also outline the limitations and non-financial considerations that also need to be taken into account.

Table MA.4

Shower gel: raw material costs
Per bottle	Quantity	Cost
Detergent	200 ml per bottle	£1.50 per litre
Perfume	50 ml per bottle	£20.00 per litre
Bottle	1 per bottle	£0.03 per bottle
Cap	1 per bottle	£0.01 per bottle

Table MA.5

Shower gel: assumptions
Per 1,000 bottles	Quantity	Cost
Direct labour	10 hours	£10 per hour
Outer packaging	10 boxes	£15 per box

Answer 1

The calculation for the NPV is shown below.

The net present value of the investment with the given considerations is £463398.2

We should however also take into consideration the following

• The assumptions here is that the cost of raw material is constant. This may change.
• The assumption is for a steady demand and growth rate for the next 5 year. We have not considered the macroeconomic factors
• The cost of third party vendors such as supply chain and derivative industries such as the bottling industry, labor cost, packaging materials, etc. could fluctuate in the next 5 years.