Nickey Products Limited is planning to launch a new product range which will involve investing in new machinery. The project has a four year life span at the end of which the machinery will be sold off. The company’s directors are currently considering investing in machine Y. Relevant data about the machine is as follows:
Machine Y
£
Initial investment
120 000
Net inflows of cash/profit
Year 1
35 000
Year 2
40 000
Year 3
55 000
Year 4
30 000
Residual value of machinery at end of year 4
40 000
The company’s policy is to depreciatemachinery on a straight line basis over its estimated useful economic life.
Question 8
Dorian Dalziel Limited is planning an investment project with the following cash inflows and outflows:
Time
Description
£
0
Cash outflow – initial investment
236 000
1
Cash inflow
77 860
2
Cash inflow
103 477
3
Cash outflow – additional investment
28 882
3
Cash inflow
115 700
4
Cash inflow
98 440
The project is not expected to run beyond the end of year 4. The company’s cost of capital is 12%.
McLuhan Mumtaz Limited is considering the launch of a new product which will involve the purchase of new production machinery. The company has undertaken an initial market research survey at a cost of £18 000. For capital investment appraisal purposes this expenditure is classified as a:
variable cost
capital cost
sunk cost
standard cost
Nickey Products Limited, see information. The accounting rate of return for the proposed investment is:
16.7%
25%
50%
33.3%
Nickey Products Limited, see information. The payback period for the proposed investment is (to nearest month):
3 years 10 months
2 years 1 month
4 years
2 years 10 months
At the end of year 5, £2200 invested now at an annual rate of 18% will be worth (to the nearest £):
£1584
£5034
£4266
£962
Assuming a constant discount rate of 8% the present value of £1563 receivable at the end of year 4 is (to the nearest £):
£2127
£1063
£1149
£1064
The discounting factor for an investment over 7 years at 13% (to 3 decimal places) is:
0.425
0.130
0.910
0.480
The directors of Digby Motor Spares Limited are considering investment in a new machine. The machine would provide cash inflows for two years and would be sold for scrap (proceeds estimated at £30 000) at the end of the period. The machine costs £860 000. It would be depreciated over its estimated useful life of two years on a straight line basis. Cash inflows are estimated at £563 000 (year 1) and £402 600 (year 2). The company's cost of capital which it uses for appraising projects is 8%. What is the NPV of this investment (to the nearest £)?
Negative NPV of £18 791
Negative NPV of £707 851
Positive NPV of £32 509
Positive NPV of £6 769
Dorian Dalziel Limited, see information. The NPV of the project is:
+ £60 986
+ £32 104
+ £40 422
+ £81 550
Which of the following statements is correct?
IRR is the discount rate which, applied to expected cash flows from a project proves that the project is worth undertaking
IRR is the discount rate which, applied to expected cash flows from a project produces an NPV of zero
IRR is the discount rate which, applied to expected cash flows from a project equals the business's cost of capital
IRR is the discount rate which, applied to expected cash flows from a project is the same as the risk free rate of return
A company has appraised a project using three different discount rates. The net present values of the projects at each of the three rates are as follows: 10% Positive NPV of £5510 13% Positive NPV of £1480 16% Negative NPV of £2216 What is the project's IRR?