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    Investment Appraisal Cases

    Uploaded by

    matheuss
    This document contains 8 questions related to investment appraisal methods such as payback period, average rate of return (ARR), net present value (NPV), and net cash flow. The questions provide scenarios for various companies considering capital investments and ask the reader to calculate and interpret various financial metrics in order to evaluate the attractiveness and viability of the proposed investments.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Investment Appraisal Cases

    Uploaded by

    matheuss
    768 views4 pages
    This document contains 8 questions related to investment appraisal methods such as payback period, average rate of return (ARR), net present value (NPV), and net cash flow. The questions provide scenarios for various companies considering capital investments and ask the reader to calculate and interpret various financial metrics in order to evaluate the attractiveness and viability of the proposed investments.

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    © © All Rights Reserved

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    PDF, TXT or read online from Scribd

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    This document contains 8 questions related to investment appraisal methods such as payback period, average rate of return (ARR), net present value (NPV), and net cash flow. The questions provide scenarios for various companies considering capital investments and ask the reader to calculate and interpret various financial metrics in order to evaluate the attractiveness and viability of the proposed investments.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    768 views4 pages

    Investment Appraisal Cases

    Uploaded by

    matheuss
    This document contains 8 questions related to investment appraisal methods such as payback period, average rate of return (ARR), net present value (NPV), and net cash flow. The questions provide scenarios for various companies considering capital investments and ask the reader to calculate and interpret various financial metrics in order to evaluate the attractiveness and viability of the proposed investments.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    Question 3.8.

    1 Verton Coffee
    Elvy Verton is considering spending $300.000 on new machinery for her coffee shop business. The
    annual contribution for this investment is forecast to be $45.000. Elvy is keen for Verton Coffee to have
    a short payback period.

    a. Define the term payback period


    b. Calculate the payback period for Verton Coffee
    c. Explain why Elvy Verton is keen to have a short payback period.

    Question 3.8.2 Mark Allegro Leasing Co.


    Mark Allegro is considering spending $50.000 to purchase new power tools for his leasing company. The
    expected net cash flow from renting the new power tools to customers over the next five years is shown
    in the table below. Mark is keen to know the payback period before deciding whether to proceed with
    the investment.

    Year Net cash


    flow $
    1 12.000
    2 14.000
    3 15.000
    4 14.000
    5 12.000
    a. Calculate the payback period for Mark Allegro Leasing Co.
    b. Comment on whether Mark Allegro Leasing Co. Should go ahead with the investment.

    Question 3.8.4 DeRogatis Computing Inc.


    DeRogatis Computing Inc. is considering investing $100.000 in new machinery. The company expects the
    annual profits from the capital expenditure will be $50.000 per year for 4 years before the machinery
    needs to be scrapped.

    a. Define the term capital expenditure


    b. Calculate the ARR for DeRogatis Computing Inc.
    Question 3.8.5 Payback Period and average rate of return
    Study the information in the table below and then answer the questions that follow.

    Net cash flow


    Year
    Project Atlanta Project Boston
    0 (140000) (140000)
    1 80000 60000
    2 60000 60000
    3 20000 60000

    a. State the cost of the investment projects under considerations


    b. Calculate the payback period for both projects, and comment on your findings
    c. Calculate the ARR for both projects
    d. Examine which investment project is more attractive.

    Question 3.8.6 Calculating net present value


    a. Calculate the net present value by completing the table below. Discount factors for 6% are
    given. Both project cost $300.000. Explain which of the two project should be pursued.
    Investment Colorado Investment Detroit
    Year Net cash Discount Present Net cash Discount Present
    flow ($) factor value flow ($) factor value
    0 (300.000) 1 (300.000) 1
    1 50.000 0.9434 100.000 0.9434
    2 100.000 0.8900 200.000 0.8900
    3 200.000 0.8396 200.000 0.8396
    4 200.000 0.7921 50.000 0.7921

    b. Suggest what other information should be considered before deciding which investment project
    to pursue.
    Question 3.8.7 Which project?
    Study the data below and answer the questions that follow. Each project costs $300.000. Assume the
    average interest rate is 4%.

    Net cash flow


    Year
    Project England Project France
    1 100.000 100.000
    2 120.000 200.000
    3 150.000 150.000
    4 200.000 100.000

    a. Define the term net cash flow


    b. Using relevant investment appraisal methods, recommend which of the following of the above
    projects would be the most attractive to investors.

    Question 3.8.8 Karoo Garments Limited


    Karoo Garments Limited is a manufacturer of fashion garments for well-known retailers in Europe. It has
    a labor force of 85 people with over half of the workers employed on a part-time contract. Staff
    retention has been an on-going problem for Karoo Garments.

    The continuous changes in the fashion industry in Europe have led Karoo Garments to devote more of
    its resources to reducing new product development time. The company is deciding whether to invest in
    new machinery to improve productivity at its factory. The cost of the investment is forecast to be
    $230.000 with an expected lifespan of four years. Current data suggest that the machinery will fetch a
    scrap value of $10.000. The project net cash flows are given below:

    Year Net cash


    flow $
    1 140.000
    2 180.000
    3 150.000
    4 100.000
    Karoo Garments Limited uses an 8% discount rate for the cost of capital. The corresponding discount
    factors are as follow:

    Year 1: 0.9259 Year 2: 0.8573 Year 3: 0.7938 Year 4: 0.7350

    a. Define the term scrap value


    b. Calculate
    a. The payback period for the project
    b. The average rate of return for the project
    c. The net present value for the project
    c. Using relevant numerical and non-numerical factors, evaluate whether Karoo Garments Limited
    should invest in the new machinery to improve productivity.

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