02.07.03 |【03】| Self-Test

Apply Understanding + Validate Knowledge

Assuming…

You are planning a new product launching in a marketplace.

You will go ahead with the plan if the expected value of the total revenue is in excess of $1,000.

Let’s say you decided to set the unit selling price at $10.

After undertaking some research studies, a number of probabilities for different levels of sales revenue are predicted (see Appendix A).

Task 01 : To decide whether the plan should be undertaken, calculate the expected sales revenue at a selling price of $10 per unit.

Appendix A

Apply Understanding + Validate Knowledge

Assuming…

You are considering an investment of $460,000 in a non-current asset which is expected to generate substantial cash inflows over the next five years.

Though the annual cash flows from the investment are uncertain and fluctuating, somehow the probability distribution has been established (see Appendix A).

At the end of its five-year life, the asset is expected to sell for $40,000.

The cost of capital is 5%.

Task 01 : Calculate net present value (NPV) to determine whether the investment should be undertaken.

Appendix A

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Assuming…

The Company is buying Component G from a supplier for manufacturing a product.

Currently, The Company is reviewing their existing policy and considering a change.

In the existing practice, The Company is placing each Component G through a detailed inspection process on delivery.

But, The Company is now considering not inspecting the Component G at all.

Experience has shown that the quality of the Component G is of acceptable standard 90% of the time.

It is important to note that it will cost $10 to inspect one(1) unit of Component G and another additional $10 to rectify any defect found at that inspection stage.

On the other hand, the cost of rework of $40 will be incurred if the Component G is not inspected at all and is then found to be faulty at the finished goods stage.

Task 01 : Advise The Company whether or not should revise their policy and change the practice.