(d) Comment on THREE factors other than NPV that the directors of ITL should consider when

Question

(d) Comment on THREE factors other than NPV that the directors of ITL should consider when deciding whether

to manufacture the Snowballer. (3 marks)

Answer 1

正确答案：
(d) Factors that should be considered by the directors of ITL include:
(i) The cash flows are estimated. How accurate they are requires detailed consideration.
(ii) The cost of capital used by the finance director might be inappropriate. For example if the Snowballer proposal is less
risky than other projects undertaken by ITL then a lower cost of capital should be used.
(iii) The rate of inflation may vary from the anticipated rate of 4% per annum.
(iv) How strong is the Olympic brand name? The directors are proposing to pay royalties equivalent to 6% of sales revenue
during the six years of the anticipated life of the project. Should they market the Snowballer themselves?
(v) Would competitors enter the market and what would be the likely effect on sales volumes and selling prices?
N.B: Only three factors were required.