Jiffy Clean plc
Introduction:
Jiffy Clean plc is a small organization which is specializedin providing on-site cleaning services to both commercial and residential customers. Jiffy Clean is analyzing a project that will introduce a new service for a period of five years and after that it wouldbe terminated. This project will start by purchasing new equipment worth GBP 220,000.
A comprehensive study has been carried out with a cost of GBP 10,000 in order to find out the expected sales and the variable costs associated with the service.The owner of Jiffy Clean, Jason Smith, has estimated that the funds invested in this project can easily give the return of 14% if invested elsewhere. Mr. Smith has decided to use Net Present Value (NPV) technique for the project appraisal process and for this reason the discounting factor of 14% can be used as this will be best option because the fund can be invested at 14% return in other project.
1. NET PRESENT VALUE:
The Net Present Value is a technique to assume the profitability of the future projects. In this technique the inflows and outflows of the project are calculated to determine the net cash flows of the project in the given future years of the project. These net cash inflows or outflows are discounted to the present value, which gives value of net present value of the project.
If a project has positive net present value,which is greater than zero,then the management of the company should decide to go for the project and to make the investment. If the Net Present Value is equal to zero, then the project is not a value addition project and gives neither return nor loss. If the Net Present Value is negative or less than zero, then the project should be definitely rejected by the management and the funds should be invested in other profitable projects.
TheNet Present Value of Jiffy clean project has been calculated on the basis of the future estimated commercial and residential sales resulted by the new project. The sales and the variables costs associated with the both type of services are given as follows:
Year Number of Residential Units (at£25 per unit) Number of Commercial Units (at£50 per unit)
1 2,000 1,500
2 2,500 2,250
3 4,000 2,100
4 3,250 2,000
5 1,750 1,900
Variable cost per unit £10 £25
The sales are estimated on the basis of the units of residential and commercial. The sales price of each unit is different.The price of the residential unit is GBP 25 and of the price commercial is GBP 50. The variable costs are also different; they are GBP 10 and 25 for residential and commercial respectively.................................
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