Mkw Oiltools Plc

1.      Executive Summary

MKW Oiltools PLC is assessing a proposal for a new down-hole tool. The purpose of this document is to evaluate whether or not the company should go ahead with the proposal and if so whether to manufacture in-house or to subcontract to the Polish engineering company, Cracow Engineering.  This document will carry out a project investment appraisal on the proposal in order to assess to the integrity and benefit of both options available to the company.

2.       Preliminary Assumptions

In compiling the financial appraisal aspect of this report, the following preliminary assumptions have been taken to account:

For the in-house option:

·        The cash required for the installation of necessary plant and equipment upgrades is readily available.

·        Each unit will have an incremental cost of £100 with a sales price of £200.

·        All other necessary resources costs required for project implementation, such as labour, materials and maintenance costs are readily available as required and have been factored into the ‘Incremental Cost per Unit,' by the management accounting section.

·        An annual depreciation charge at 0.25% shall apply.

·        The ‘hurdle rate,' is 10% i.e. the 10% weighted average cost of capital rate (WACC) used by the company for average risk projects.

For the subcontract option:

·        There is no initial investment outlay.

·        No advance payment by MKW Oiltools PLC is required and any payment to Cracow will be on delivery to MKW Oiltools PLC.

·        No additional services/ costs such as ordering costs will be incurred by MKW Oiltools PLC.

·        The price per tool is fixed at £175 in the instance that increased demand results in the need for more than 12,000 units per year.

·        It has been assumed