Impega plc is considering whether or not to undertake a one off project. The initial investment required is £150,000 but it also requires additional working capital of £30,000 to be made available at the same time as the initial investment. This working capital would be released at the end of the project. Writing Down Allowance (WDA) of 25% on a reducing balance basis is available for the initial investment. The allowance can first be claimed against the first year revenues (cash inflows) as the company has no other income to set the allowances against. As the company pays tax 1 year in arrears the tax saving will take place in the following year. The company expects pre tax cash inflows from the project to be £45,000 each year for the first 3 years and £60,000 for each of the following 2 years. At the end of the project there will be no scrap value. Impega has a cost of capital is 10% and pays Corporation Tax at a rate of 30%. Required (a) Calculate the project's net present value (NPV) and advise the company whether or not to proceed with the project. (b) Calculate IRR of the project. Use 15% discount rate as the second rate. (c) State the advantages and disadvantages of using internal rate of return (IRR) when evaluating investment projects.

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
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Impega plc is considering whether or not to undertake a one off project. The initial investment required is £150,000 but it also requires additional working capital of £30,000 to be made available at the same time as the initial investment. This working capital would be released at the end of the project. Writing Down Allowance (WDA) of 25% on a reducing balance basis is available for the initial investment. The allowance can first be claimed against the first year revenues (cash inflows) as the company has no other income to set the allowances against. As the company pays tax 1 year in arrears the tax saving will take place in the following year.

The company expects pre tax cash inflows from the project to be £45,000 each year for the first 3 years and £60,000 for each of the following 2 years. At the end of the project there will be no scrap value. Impega has a cost of capital is 10% and pays Corporation Tax at a rate of 30%.

Required

(a) Calculate the project's net present value (NPV) and advise the company whether or not to proceed with the project. (b) Calculate IRR of the project. Use 15% discount rate as the second rate.

(c) State the advantages and disadvantages of using internal rate of return (IRR) when evaluating investment projects.

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