The following discussion presents hypothetical information relating to a new proposal designed to enhance environmental and social performance across Jayco's supply chain. The management team of Jayco have just received a new proposal from James Peters, one of the firm's sustainability officers. Dr Peters, has suggested that the firm should establish a new supplier audit team. Over the next 5 years, the audit team would conduct random audits of the environmental and social performance of Jayco's key suppliers. For each of the next five years, the costs of running the team will consist of staffing costs ($750,000 p.a.), travel costs ($130,000 p.a.) and other costs ($80,000). Beyond these costs, the team will further require depreciable testing equipment costing $450,000. This equipment will be depreciated using the straight-line method over the 5-year life of the team. The briefing prepared by James Peters for the management team suggests that over the five years, the audit team will reduce the firm's operating costs by $800,000 p.a. and improve the firm's reputation. The enhancement to the firm's reputation is expected to result increase the firm's sales by $2.0 million p.a. On average, cost of sales is expected to be 60% for every sales dollar.
The firm’s tax rate is 30%. The firm requires a 14% required rate of return on all potential investments.
Required:
In relation to the above proposal, calculate the:
Annual after tax cash flows and annual after tax profit from the new manufacturing process.
Payback period
Net present value and internal rate of return
Accounting rate of return
Provide an overview of the key environmental and social factors that Jayco should consider in evaluating the proposal
Based on an assessment of financial considerations and other factors, provide a recommendation as to whether Jayco should go ahead with the proposal. How sensitive are your recommendations to changes in projections of the financial impact of the new capital investment?