Limitless Ltd. is planning to buy a new warehouse to store its production output. The investment would require £500,000 to be paid upfront. Thanks to the new warehouse, the company expects to increase its profits by £120,000 annually for the next five years, and then £60,000 for the following five years. a) Calculate the Net Present Value (NPV) of this investment opportunity if the cost of capital is 12%. [3 marks] b) Should Limitless Ltd. go ahead with the purchase of the new warehouse? Explain your reasoning. [3 marks] c) What is the payback period of this investment? [3 marks]
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
Limitless Ltd. is planning to buy a new warehouse to store its production output. The investment would require £500,000 to be paid upfront. Thanks to the new warehouse, the company expects to increase its profits by £120,000 annually for the next five years, and then £60,000 for the following five years.
a) Calculate the
b) Should Limitless Ltd. go ahead with the purchase of the new warehouse? Explain your reasoning. [3 marks]
c) What is the payback period of this investment? [3 marks]
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Please only answer PART F
d) Suppose the
Would this decision be consistent with that from B? Explain your reasoning.
e) Suppose that, instead of paying the initial £500,000 now, Limitless Ltd. decides to pay it in equal instalments over the next 10 years. How much would the company
need to pay each year to make all these payments equivalent to £500,000 today?
f) Now assume that an alternative project would generate immediate (time zero) net profits of £500,000 upfront, but after that, it would result in annual losses of
£120,000 over the next five years, and then the annual losses of £60,000 over the following five years. The cost of capital is 12% and the IRR is 15%. Should you start this project? Explain your reasoning. Would you make the same decision based on
by Bartleby ExpertCan you please answer these follow up questions from the above question:
d) Suppose the
Would this decision be consistent with that from B? Explain your reasoning.
e) Suppose that, instead of paying the initial £500,000 now, Limitless Ltd. decides to pay it in equal instalments over the next 10 years. How much would the company
need to pay each year to make all these payments equivalent to £500,000 today?
by Bartleby Expert
