Hasbro Plc, an airline navigation supplier, is in the process of buying a start-of-the art navigation software. The initial investment in the new software is £130,000. The annual cash flows are expected to be: Year 1 £38,000 Year 2 £43,000 Year 3 £50,000 Hasbro Plc employs a cost of capital of 6%. The rate of inflation is expected to be 3% for the duration of the project. Required: Calculate the (undiscounted) Payback Period of the project, taking inflation into account.

Hasbro Plc, an airline navigation supplier, is in the process of buying a start-of-the art navigation software. The initial investment in the new software is £130,000. The annual cash flows are expected to be: Year 1 £38,000 Year 2 £43,000 Year 3 £50,000 Hasbro Plc employs a cost of capital of 6%. The rate of inflation is expected to be 3% for the duration of the project. Required: Calculate the (undiscounted) Payback Period of the project, taking inflation into account.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 1PA: Your company is planning to purchase a new log splitter for is lawn and garden business. The new...

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Hasbro Plc, an airline navigation supplier, is in the process of buying a start-of-the art navigation software. The initial investment in the new software is £130,000. The annual cash flows are expected to be: Year 1 £38,000 Year 2 £43,000 Year 3 £50,000 Hasbro Plc employs a cost of capital of 6%. The rate of inflation is expected to be 3% for the duration of the project. Required: a) 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. b) 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. c) Discuss the likely impact of your outcomes in parts a) and b) above on Hasbro Plc.
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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. Required:a) Calculate the ARR of the project, taking inflation into account. b) Calculate the (undiscounted) Payback Period of the project, taking inflation into account.
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. Required:a) Calculate the ARR of the project, taking inflation into account. b) Calculate the (undiscounted) Payback Period of the project, taking inflation into account. c) Calculate the NPV of the project using the money cost of capital as the discount rate. d) Calculate the NPV of the project using the real rate of return as the discount rate (round up to 2 decimal places). e) Discuss the impact that the decision made on the project acceptance based on the money cost of capital and real rate of return would have on Delta Plc.
Delta Plc is considering investing in bespoke software solutions, which requires an initial investment of £130,000. The annual cash inflows during years 1-3 are expected to be £38,000 for year 1; £43,000 for year 2 and £50,000 for year 3. The company’s money cost of capital is 6% and inflation is expected to be 3% during the life of the project. a) Calculate the ARR of the project, taking inflation into account. b) Calculate the (undiscounted) Payback Period of the project, taking inflation into account. c) Calculate the NPV of the project using the money cost of capital as the discount rate. d) Calculate the NPV of the project using the real rate of return as the discount rate (round up to 2 decimal places). e) Discuss the impact that the decision made on the project acceptance based on the money cost of capital and real rate of return would have on Delta Plc.
Delta Plc is considering investing in bespoke software solutions, which requires an initial investment of £130,000. The annual cash inflows during years 1-3 are expected to be £38,000 for year 1; £43,000 for year 2 and £50,000 for year 3. The company’s money cost of capital is 6% and inflation is expected to be 3% during the life of the project. Required: c) 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. d) 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. e) Discuss the likely impact of your outcomes 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. Required: a) Calculate the NPV of the project using the real rate of return as the discount rate (round up to 2 decimal places). b) Discuss the impact that the decision made on the project acceptance based on the money cost of capital and real rate of return would have on Delta Plc.
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ABC Ltd is considering adding a new product line. Adding the product line would require additional investment of £0.5 million today and would return cash flow of £0.6 million in one years time.ABCs assets consist of £0.5 million in cash, as well as production facilities to produce its existing products. Next year these facilities will return cash flows of £5 million if the demand is high and £2 million if the demand is low. The probability of high demand is 70% . The firms discount rate is 0% and you can ignore all cash flows extending beyond one year.Assume that ABC has no debt. (a) What is the expected net worth of ABCs owners if they do not add the new product line and instead pay the cash out as dividends? ( b) What is the expected net worth of ABCs owners if they choose to add the new product line instead of paying out dividends? (c) Now redo assuming the company has debt with face value $2.5 million due in one year. What is the expected net worth of ABCs owners if they do not add…