31. Flyers plc operates public transport services in major cities in the United Kingdom (UK). The company uses the accounting rate of return (ARR) and payback methods to support investment decision making. You are a Senior Finance Manager at Flyers plc. The company intends to bid for new five-year contracts to operate bus services in either Edinburgh, UK, or Newcastle upon Tyne, UK. Both contracts require the successful bidder to pay a franchise fee to secure the contract and to invest i new fleet of buses. Sufficient funding is available to finance only one of these options.
31. Flyers plc operates public transport services in major cities in the United Kingdom (UK). The company uses the accounting rate of return (ARR) and payback methods to support investment decision making. You are a Senior Finance Manager at Flyers plc. The company intends to bid for new five-year contracts to operate bus services in either Edinburgh, UK, or Newcastle upon Tyne, UK. Both contracts require the successful bidder to pay a franchise fee to secure the contract and to invest i new fleet of buses. Sufficient funding is available to finance only one of these options.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
a) Calculate the payback for both the Edinburgh and Newcastle upon Tyne
contracts.
b) Critically evaluate the payback technique
c) Advise Flyers plc’s senior executive team on the comments made by Chang
Ying Simmonds and Travis van Riemsdyk. Your advice should include an
explanation of the characteristics of investment appraisal decisions and the
advantages and disadvantages of the
Transcribed Image Text:31. Flyers plc operates public transport services in major cities in the United
Kingdom (UK). The company uses the accounting rate of return (ARR) and
payback methods to support investment decision making. You are a Senior
Finance Manager at Flyers plc.
The company intends to bid for new five-year contracts to operate bus services in
either Edinburgh, UK, or Newcastle upon Tyne, UK. Both contracts require the
successful bidder to pay a franchise fee to secure the contract and to invest in a
new fleet of buses. Sufficient funding is available to finance only one of these
options.
Edinburgh
£000
Newcastle
£00
Franchise fee (year 0)
New buses (year 0)
Scrap value (year 5)
8,700
7,950
3,890
4,120
110
95
Forecast net cash inflows
Year 1
3,780
4,150
4,550
3,500
3,850
4,200
Year 2
Year 3
Year 4
5,120
4,900
5,150
4,950
Year 5
Assume that all cash flows occur at the end of the respective year.
The company's approach to investment appraisal was discussed at a recent
meeting of Flyers plc's senior executive team. Chang Ying Simmonds, Director of
Marketing at Flyers plc, is keen to understand the nature of investment decisions.
Chang Ying has commented:
These decisions appear to have particular characteristics. We need to understand
why investment decisions are of importance to the business: this will help us to
appreciate if our approach to investment appraisal is appropriate.
Travis van Riemsdyk, Chief Operating Officer at Flyers plc, has highlighted that the
internal rate of return (IRR) method can be of use in investment appraisal. Travis
has commented:
Like other investment appraisal methods, the IRR has both advantages and
disadvantages. I would like to know more about the strengths and weaknesses of
the IRR.
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