There are four main methods of investment appraisal: Accounting Rate ofReturn, Payback, Net Present Value and Internal Rate of Return. Criticallyevaluate each method and briefly discuss their advantages anddisadvantages. Keane & Co plc is considering two possible investments. The company requires anAccounting Rate of Return of 12% and payback within 2 years. It has a cost ofcapital of 12%.Forecast sales and production unitsYear 1Year 2Year 3Year 4Contribution per unitFixed cost per yearInitial investmentResidual (scrap) valueAccounting Rate of ReturnInternal Rate ReturnDiscount factors at 12% are:Year 1Year 2Year 3Year 4Year 50.8930.7970.7120.6360.567Project J60,000110,00080,00050,000£40£800,000£7,600,000£300,0009.5%8%Project K30,00024,00020,00012,000£120£700,000£5,500,000£150,00019%18%

Capital budgeting: A business uses capital budgeting as a tool to assess potential big projects or…

Answered: Keane & Co plc is considering two…

Keane & Co plc is considering two possible investments. The company requires an Accounting Rate of Return of 12% and payback within 2 years. It has a cost of capital of 12%.

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

Section: Chapter Questions

Problem 1PS

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A firm that applies a 20% MARR on its investments is considering one of two 7-year engineering projects. Project 1 requires an initial investment of P4M, would generate an annual income of P2M, and would entail an annual cost of PO.4M. Project 2 requires P7M, which would generate an annual income of P3.7M for the first three years and P3M for the remaining four years, this project would incur annual disbursements of P0.8M. Indicate the better alternative using the incremental investment approach. (Ans. Project 2 is better; 12.1 =29.17%)
A man invests in a project that requires a fixed capital of P 2.5 M with no salvage, and life of 12 years. During its life an estimated maintenance cost of P 280, 000 will be spent each year. Taxes and insurance will be 5 % of the first cost. The project will yield a uniform annual revenue of P 1M. The company expects to earn 20% before income taxes. Compute the rate of return. Select one: a. 8.38% b. 6.54% c. 5.65% d. 7.12%
ABC Ltd. is considering an investment which would require the immediate purchase of a capital asset costing €400,000 and working capital of €120,000. Net inflows will be €180,000, €160,000 and €140,000 for year one, year two and year three. Working capital will increase by 20% per year in each of the first two years. All of the working capital will be turned into cash at the end of year three. The company’s cost of capital is 15%. The NPV of the investment (ignoring taxation), to the nearest whole number, is:
M& B is considering investing in Project X which requires an initial investment of P15,000. The firm`s cost of capital is 9%. The project is expected to last for six years and provide an annual cash flow of P3,000. What is this projects breakeven cash flow? A. P3,434.00 B. P3,334.00 C. P3,344.00
SeaCruises plc is evaluating the purchase of a new ship. The ship would cost £25 million upfront to purchase, and it would operate for 10 years. The net cash flows from operating the ship are expected to be £4 million at the end of the first year, and to grow at 2% per year. At the end of 10 years, the ship will be sold for an expected value of £50 million. The company's cost of capital is 1% per year. What is the Net Present Value of this investment, in £ million? O A. 41.42 million B. 86.68 million OC. 61.68 million O D. 106.94 million
Mr Lee has a fixed capital investment of 20M for a proposed manufacturing estimated to be 10% of the fixed capital investment. Determine the approximate profit expected annually if the minimum pay-out period is 3 years.
Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $14,700 and will produce cash flows as follows: End ofYear Investment A B 1 $ 9,300 $ 0 2 9,300 0 3 9,300 27,900 The present value factors of $1 each year at 15% are: 1 0.8696 2 0.7561 3 0.6575 The present value of an annuity of $1 for 3 years at 15% is 2.2832 The net present value of Investment B is: Multiple Choice $(18,344). $8,679. $3,644. $46,244. $13,200
Your company has an opportunity to invest in four companies. You are trying todetermine which of these investments make sense. Your company has a 9% cost ofcapital. It will invest in these companies and receive an annual cash dividend eachyear starting one year after the investment. At the end of the term of investment, theinvestment will be scrapped with no salvage value. (a) Determine the internal rate ofreturn for each investment. Round off to the nearest integer discount rate, withdetailed calculation process. (b)Which investments would you recommend yourcompany make?
Mett Co. is planning to develop a new product. A year after the launch of the product, itcan generate additional cash flows for the company of either £250,000, £110,000,£90,000 or £50,000, with all four scenarios equally likely. The project requires an initialinvestment of £90,000. The company’s beta is 0.65, its cost of capital is 6%, and the riskfree rate is 3%. Assume perfect capital markets. a) What is the Net Present Value (NPV) of the project? b) Suppose that the project is sold to investors as an all-equity firm to raise funds forthe initial investment. The cash flows of the project will be distributed to equityholders in one year. How much money can be raised in this way – that is, what isthe initial market value of the unlevered equity? Explain your answer.
Panthers plc is considering a project which will generate cash flows of £5,000 each year from years 3 to 7. The company has a cost of capital of 14%. What is the total present value of the cash flows? a) £21,440 b) £13,210 c) £17,090 d) £17,165
The restaurant chain company ESTIASI Limited is considering the case of investing in a new restaurant which requires an initial cost of € 120,000. Cash inflows for the first two years are expected to be € 40,000, in the third year to increase to € 46,000 and in the fourth year to € 50,000. The annual capital cost of the company is 6%. Calculate the Net Present Value (CVA) of the investment

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