Question: Background GAVI Plc Is Highly Involved In Research For Diagnostic Solutions In Respect Of The SARS-CoV-2 Virus. It Plans To Purchase A New Piece Of Equipment To Supply A New Product, “Tedros”. The Equipment Will Cost £595,000 And Is Expected To Have A Useful Life Of Four Years. Scrap Value At The End Of Its Life Will Be £35,000. GAVI Plc Expects That …

## Transcribed Image Text from this Question

Background GAVI plc is highly involved in research for diagnostic solutions in respect of the SARS-CoV-2 virus. It plans to purchase a new piece of equipment to supply a new product, “Tedros”. The equipment will cost £595,000 and is expected to have a useful life of four years. Scrap value at the end of its life will be £35,000. GAVI plc expects that demand for Tedros will be: Year Demand (units) 1 70,000 90,000 3 110,000 4 50,000 The following information should be used in preparing your report: 1. The selling price for Tedros is expected to be £14.45 per unit. Variable costs are expected to be £8.35 per unit. 2. Incrementalannual fixed production overheads of £29,500 per year will also be incurred. 3. The selling price and costs we expressed in today’s price terms. 4. Expected increases in the selling price and production costs are as follows: Selling price of Tedros Variable costs Fixed overheads Increase 4.75% per year 5.25% per year 6.35% per year 5. It should be noted that GAVI plc has a real cost of capital of 4.5% and pays tax at an annual rate of 30% one year in arrears. 6. Capital allowances on a 25% reducing balance basis are available. General inflation is expected to be approximately 7% each year. 7. GAVI plc has a target return on capital employed of 35%. Depreciation is charged on a straight-line basis over the life ofthe equipment. You are a consultant working with CEPI. You are required to prepare a report (maximum 2000 words) that sets out clearly the following findings for GAVI plc: (a) Calculation of the Net Present Value of buying the new machine – please provide comments on your findings and clearly state any assumptions, if any, used in arriving at your answer. (17 marks) Styles in (b) Calculate the Accounting Rate of Return stating clearly the metric used by you – please provide comments on your findings and clearly state any assumptions, if any, used in arriving at your answer. (5 marks) (c) Calculate the Internal Rate of Return – please provide comments on your findings and clearly state any assumptions, if any, used in arriving at your answer. (8 marks) (d) Provide a concise critical analysis and assessment of modern investment appraisal techniques using recent academic research and industry practice. Your answer should be based on techniques (ARR, IRR, Payback and NPV) already discussed in class. Apply this to GAVI plc and discuss why NPV may be the preferred investment technique. (25 marks) (e) Outline and provide a brief analysis of the possible sources of finance available to GAVI plc to make its planned equipment purchase if internal funding sources are not available. (15 marks) () As part of your suggested readings on the financial statement analysis Moodle Book on your module, selected reports highlight the financial impact of the ongoing Covid-19 pandemic. Based on your studies of the module and taking into account the issues raised in the reports, what would you consider likely to impact GAVI plc the most? You are free to relate your answer to what issues you might consider the most important as a finance manager on the basis of materials covered throughout the module as well as your wider reading on the financial challenges of the pandemic. Provide reasoned suggestions to GAVI ple management, supported by academic research and industry practice, to address the issues identified by you. (30 marks) For each of the above six questions, the available marks are detailed and total 100 marks. With good online preparation and participation, students should be able to obtain almost full marks in parts (a), (b) and (c). Parts (d), (e) and ( require a good attempt at research. For example, part (d) requires more than merely stating the advantages and disadvantages of each investment appraisal method. Approximately a third of the marks available for sections (d), (e) and (t) are allocated based on having a basic understanding, a further third for making an effort to identity research in the area and the final third of the marks reflecting greater research while also applying background details and the facts provided in the question,