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 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, and state clearly whether the project should be undertaken by the company.
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 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, and state clearly whether the project should be undertaken by the company.
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 5PA: Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated...
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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 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, and state clearly whether the project should be undertaken by the company.
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