Problem 1
The following table presents the gas consumption of inhabitants of semi-detached house.
| Year | Neighbor 1 | Neighbor 2 |
|---|---|---|
| 2008 | 3000 m^3 | 3300 m^3 |
| 2009 | 3700 | 4200 |
| 2010 | 3400 | 3800 |
They have the same heating installation and the same heating habits. It seems that the only reason of lower gas consumption of neighbor 1 is an additional loft insulation. Neighbor 2 considers putting additional insulation and she has gathered following information:
loft’s surface area is 9m x 16 m,
price of gas – 1,5 PLN per cubic meter,
The roll of insulation material is sold for a 150 PLN each. The size of one roll is 1,2 m x 10 m.
to initiate the investment she will take credit at the rate 12% a year.
there is a chance of moving to another city (promotion and leaving the house as a consequence) in four, or maybe five year time.
Is loft insulation project attractive?
Problem 2 (buy or make)
The X Firm buys packages for 10 PLN each in Salzburg, Austria. Firm’s X accountant noticed, that those packages can be produced in one of firm’s X factory located in Wrocław, Poland. The assembly line can be purchased for 400’000 PLN and the estimated cost of a package will be 2 PLN. The accountant’s proposition is to launch this project in Poland because the initial cost will be recovered after producing 50000th unit.
Regardless of the merit of his opinion the project evaluation was appointed to the financial department. The financial analyst has collected following information:
The X firm demands 25’000 units per year
The line will be operational for 5 years. Afterwards its market value will be 15’000 PLN (after tax).
The project will increase firm’s revenues by 4%, that’s why 4% (i.e. 70’000 per year) of firm’s overhead cost will be included in calculation.
The 5-year straight line depreciation will be used.
The firm’s cash tax rate is 25%.
The firm’s cost of capital is 15%.
The net working capital (NWC) expenditures of 20’000 will be carried at the very beginning of the investment. No change in NWC value is assumed.
The assembly line will be placed in the unoccupied place in Polish plant and its maintain cost is 30’000 per year.
Should the project be launched in Poland?