- Professional Essay Writing Service
- +1 810 395 5448
- support@criticalassignment.com

1. A company is considering the following investment projects. Both would involve

purchasing machinery with a life of 5 years.

• Project 1 would generate annual cash flows of £150,000; the machinery would

cost £350,000 and have a scrap value of £45,000.

• Project 2 would generate annual cash flows of £250,000; the machinery would

costs £800,000 and have a scrap value of £350,000.

The company’s discount rate is 12%. Assume that the annual cash flows arise on the

anniversaries of the initial outlay.

Calculate the net present value and payback for each project and state which project the

company should accept and why.

2. A firm can buy a new printer for £2,000 payable immediately. The new printer

would make cash savings for the firm of £2,000 in the first year of operation,

£4,000 in the second year and £2,000 in the fifth year.

The firm makes no savings from the printer in the third and fourth year of its life, and

will need to spend £4,000 on it in year 3 because of expensive repairs. The machine is

scrapped at the end of 5 years, but there is no scrap value.

As an alternative to outright purchase, the firm could hire a printer, paying £1000 per

annum, in advance, for the 5 years. The firm would still expect to make the same costs and

savings as in outright purchase, but the hire company would meet the repair cost of year 3.

If the going rate of interest is 10%, using net present value, advise the firm as to which

of the two methods (buy or hire) should be used to obtain the printer.

3. Trigger PLC is a manufacturer of computer components and a decision is required

on a proposal to invest £1,800,000 on a new machine in order to move into a new

market for components. The financial details are as follows:

The company has a target rate of return of 11% and a payback criterion of 4 years.

(a) Calculate the payback period.

(b) Calculate the project’s net present value.

(c) Advise the company on whether it should proceed with the project. Provide

reasons for your advice.

4. A company is considering an investment of £1.4 million in a project that has a

seven-year life. The company has estimated its discount rate at 12%. Details of the

sales and costs arising from this project are as follows:

Sales volume: 250,000 units per annum

Note that the annual overhead includes £200,000 per year depreciation on the asset. It also

includes apportioned fixed overheads of a further £50,000 per year.

(a) Calculate the net present value of the project. Provide a commentary on the discounting process and on the net present value that you have calculated.

(b) Carry out a sensitivity anlaysis on five variables of this project, including the life

of the project and the discount rate. Identify what you consider to be the most critical variable and advise management what they should do, if anything, before

adopting this project.

error: Content is protected !!

Open chat

You can contact our live agent via WhatsApp! Via our number +1 (323) 333-4455.

Feel Free To Ask Questions, Clarifications, or Discounts, Available When Placing the Order.