As an Alphabet Holdings Plc junior management accountant, the Finance Director wants your calculations and recommendation regarding an expansion plan the Board is considering, which includes a chain of factory outlet stores. Below are the figures for the first one that is planned for a central Birmingham location next year. Company policy dictates that any decision should be based on the results of calculating Net Present Value (NPV) of 3 years of cash flows using a cost of capital of 12%, Payback Period (PBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a 5% cushion in case of increases in inflation or interest rates. The investment consists of £100,000 for the land, building costs of £158,000, and £36,600 for fittings and equipment. The cash flows in year 1 are expected to be: total sales revenue £600,600; the cost of Axor products sold £165,900; Bozon stock sold £118,860; staff costs £24,780; light & heat £35,196; other overheads £134,904. The cash flows for years 2 and 3 are the same, but are expected to increase by 2% inflation each year. Requirements for Question 3 Using the information above and in accord with the above stated company policy you are required to calculate: Net Present Value (NPV) Payback period (PBP) and Discounted Payback Period (DPBP) Internal Rate of Return

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 8TP: Fenton, Inc., has established a new strategic plan that calls for new capital investment. The...

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As an Alphabet Holdings Plc junior management accountant, the Finance Director wants your calculations and recommendation regarding an expansion plan the Board is considering, which includes a chain of factory outlet stores.

Below are the figures for the first one that is planned for a central Birmingham location next year.

Company policy dictates that any decision should be based on the results of calculating Net Present Value (NPV) of 3 years of cash flows using a cost of capital of 12%, Payback Period (PBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a 5% cushion in case of increases in inflation or interest rates.

The investment consists of £100,000 for the land, building costs of £158,000, and £36,600 for fittings and equipment.

The cash flows in year 1 are expected to be: total sales revenue £600,600; the cost of Axor products sold £165,900; Bozon stock sold £118,860; staff costs £24,780; light & heat £35,196; other overheads £134,904. The cash flows for years 2 and 3 are the same, but are expected to increase by 2% inflation each year.

Requirements for Question 3

Using the information above and in accord with the above stated company policy you are required to calculate:

Net Present Value (NPV)

Payback period (PBP) and Discounted Payback Period (DPBP)

Internal Rate of Return

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