Investment Appraisal

1
Investment Appraisal

• Answers

2
Payback 1m

• Year Project A Cash Inflow Project B Cash
  Inflow
• 1 500 000 100 000
• 2 300 000 200 000
• 3 200 000 300 000
• 4 100 000 800 000
• Calculate the payback periods for these two
  investment projects. Which one would you choose?
  Why?
• A 3 years
• B 3 years (800,000/12 6666.667 .
  400,000/6666.67 ) 6 months
• If you could afford to wait for 6 mths option B
  is better since it generates an extra 400,000
  whereas A paybacks 6 months earlier with an extra
  100,000.

3
ARR

• Purchasing new IT equipment for Miller
  Reprographics is estimated to cost 120 000 and a
  return of 220,000 over five years is
  anticipated.
• Calculate the ARR for Miller Reprographics.

• 220,000 120,000 100,000
• 100,000/5 years 20,000
• 20,000/120,000 x 100 16.67

4
NPV
Automation is cheaper and final value NPV is
greater. What other qualitative factors would
you consider?
5
Q4

• Thames Radio is considering investing in new
  broadcasting equipment. The cost of the
  investment is forecast to be 150 000. The
  expected additional revenue from being able to
  broadcast to a larger area is 40 000 per annum.
  What is the payback period of this investment?

• 150,000/40,000 3.75 years
• Whats 0.75 of a year?
• ¾ of a year
• i.e. 9 months

6
Q 7

• Wessex Leisure is considering the purchase a
  pleasure cruiser for use in the Solent. The
  Meriden is available at a cost of 900 000 and
  would cost 100 000 each year to operate. Over
  its ten year life the cruiser would generate 280
  000 in revenue each year. Calculate the average
  rate of return on this investment

• ARR
• 900,000 (100,000 x 10 years)
• 2,800,000 - 1,900,000 900,000
• 900,000 / 10 90,000 p.a
• 90,000 / 1,900,000 x 100 4.73

7
Q9

• Chedgrave Printers are appraising the costs and
  benefits from a new piece of machinery. The
  equipment costs 300 000 and has a working life
  of 4 years. The company expects the generate
  revenue of 120 000 each year if they purchase
  the machine. Calculate the net present value of
  this project assuming an interest rate of 10.