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Delta Plc is considering investing in Bespoke Software Solutions, which requires an initial investment of £150,000. The annual cash inflows during years 1-3 are expected to be £50,000 for year 1; £55,000 for year 2 and £62,000 for year 3. The company’s money cost of capital is 7% and inflation is expected to be 4% during the life of the project. 1- Calculate the ARR of the project, taking inflation into account. 2- Calculate the (undiscounted) Payback Period of the project, taking inflation into account.  3- Calculate the NPV of the project using the money cost of capital as the discount rate, and state clearly whether the project should be undertaken by the company. 4- Calculate the NPV of the project using the real rate of return as the discount rate (round up to 2 decimal places), and state clearly whether the project should be undertaken by the company.5- Discuss the likely impact of the project acceptance decisions you have recommended in parts c) and d) above on Delta Plc.

Delta Plc is considering investing in Bespoke Software Solutions, which requires an initial investment of £150,000. The annual cash inflows during years 1-3 are expected to be £50,000 for year 1; £55,000 for year 2 and £62,000 for year 3. The company’s money cost of capital is 7% and inflation is expected to be 4% during the life of the project. 1- Calculate the ARR of the project, taking inflation into account. 2- Calculate the (undiscounted) Payback Period of the project, taking inflation into account.  3- Calculate the NPV of the project using the money cost of capital as the discount rate, and state clearly whether the project should be undertaken by the company. 4- Calculate the NPV of the project using the real rate of return as the discount rate (round up to 2 decimal places), and state clearly whether the project should be undertaken by the company.5- Discuss the likely impact of the project acceptance decisions you have recommended in parts c) and d) above on Delta Plc.

Principles of Accounting Volume 2
Principles of Accounting Volume 2
19th Edition
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 2PA: Jasmine Manufacturing is considering a project that will require an initial investment of $52,000...
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Delta Plc is considering investing in Bespoke Software Solutions, which requires an initial investment of £150,000. The annual cash inflows during years 1-3 are expected to be £50,000 for year 1; £55,000 for year 2 and £62,000 for year 3. The company’s money cost of capital is 7% and inflation is expected to be 4% during the life of the project.


1- Calculate the ARR of the project, taking inflation into account.

2- Calculate the (undiscounted) Payback Period of the project, taking inflation into account. 

3- Calculate the NPV of the project using the money cost of capital as the discount rate, and state clearly whether the project should be undertaken by the company.

4- Calculate the NPV of the project using the real rate of return as the discount rate (round up to 2 decimal places), and state clearly whether the project should be undertaken by the company.

5- Discuss the likely impact of the project acceptance decisions you have recommended in parts c) and d) above on Delta Plc.

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