State the advantages and disadvantages of each capital investment appraisal method b. Calculate the risk and return presented by the Fastcoat and Speedscreen options and a recommendation as to which option should be chosen, given the lack of investment capital available to the company
State the advantages and disadvantages of each capital investment appraisal method b. Calculate the risk and return presented by the Fastcoat and Speedscreen options and a recommendation as to which option should be chosen, given the lack of investment capital available to the company
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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1. State the advantages and disadvantages of each capital investment appraisal method
b. Calculate the risk and return presented by the Fastcoat and Speedscreen options and a recommendation as to which option should be chosen, given the lack of investment capital available to the company
Transcribed Image Text:Vardy Visual Viewing Ltd is planning on purchasing a new piece of automatic screen coating equipment to make
production processes more efficient and help save costs.
There are two options for the new piece of equipment. The Fastcoat will further automate production processes
for small products such as mobile phone screens. The Speedscreen will improve production processes and
product quality for larger High Definition products.
The following information about the cash flows, profits and capital investment appraisal measures has been
provided to you. The company's cost of capital is currently 6%.
Fastcoat
Cash flow (£)
6%
Depreciation (E) Profit (£) Cumulative cash
flow (E)
Present
Year
Factors
value (E)
(1,000,000)
1.0000
(1,000,000)
(1,000,000)
1
350,000
0.9434
330,190
(176,000)
174,000
(650,000)
2
300,000
0.8900
267,000
(176,000)
124,000
(350,000)
(176,000)
(176,000)
3
250,000
0.8396
209,900
74,000
(100,000)
4
210,000
0.7921
166,341
34,000
110,000
5
180,000
0.7473
134,514
(176,000)
4,000
290,000
120,000
0.7473
89,676
410,000
NPV =
197,621
410,000
Payback period
3 years 6 months
14.6%
Accounting rate of return
Internal rate of return
13.1%
Speedscreen
Cash flow (E)
Depreciation (E) Profit (E) Cumulative cash
flow (E)
6%
Present
Year
Factors
value (E)
(1,500,000)
284,000
1.0000 (1,500,000)
(1,500,000)
1
0.9434
267,926
(262,200)
21,800
(1,216,000)
2
331,000
0.8900
294,590
(262,200)
68,800
(885,000)
3
394,000
0.8396
330,802
(262,200)
131,800
(491,000)
4
473,000
0.7921
374,663
(262,200)
210,800
(18,000)
551,000
0.7473
411,762
(262,200)
288,800
533,000
189,000
0.7473
141,240
722,000
NPV
320,983
722,000
Payback period
4 years 1 month
17.1%
Accounting rate of return
Internal rate of return
12.2%
*The second cash flow in year 5 for each option represents the sales proceeds on the disposal of the equipment
at the end of its lif (residual value).
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