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Basril Co is reviewing investment proposals that have been submitted by divisional managers. The investment funds of the company are limited to $800,000 in the current year. Details of three possible investments, none of which can be delayed, are given below.

Project 1

An investment of $300,000 in work station assessments. Each assessment would be on an individual employee basis and would lead to savings in labour costs from increased efficiency and from reduced absenteeism due to work-related illness. Savings in labor costs from these assessments in money terms are expected to be as follows:

Year  1 2 3 4 5
Cash flows ($'000)  85 90 95 100 95

Project 2

An investment of $450,000 in individual workstations for staff that is expected to reduce administration costs by $140,800 per annum in money terms for the next five years.

Project 3

An investment of $400,000 in new ticket machines. Net cash savings of $120,000 per annum are expected in current price terms and these are expected to increase by 3.6% per annum due to inflation during the five-year life of the machines.

Basril Co has a money cost of capital of 12% and taxation should be ignored.

Requirements:

a

Determine the best way for Basril Co to invest the available funds and calculate the resultant NPV:

  1. on the assumption that each of the three projects is divisible;
  2. on the assumption that none of the projects are divisible.               
Marks: 10
b

Explain how cash shortages can restrict the investment opportunities of a business.    

Marks: 5
c

Discuss the meaning of the term ‘relevant cash flows’ in the context of investment appraisal, giving examples to illustrate your discussion.

Marks: 5

Answers submitted

Created by Ref Marking Action
Rakhi Gupta's picture
Rakhi Gupta
11/13/2020 - 15:28
a
10144
10
Rakhi Gupta's picture
Rakhi Gupta
11/13/2020 - 16:05
b
10146
5
Rakhi Gupta's picture
Rakhi Gupta
10/20/2020 - 10:03
a
9860
10
Rakhi Gupta's picture
Rakhi Gupta
10/20/2020 - 10:25
c
9864
5
Naima Husne Jahan's picture
Naima Husne Jahan
10/18/2020 - 18:13
a
9840
10
Shakhaoat Hossain shibly's picture
Shakhaoat Hossa...
10/09/2020 - 11:30
a
9766
10
Rakhi Gupta's picture
Rakhi Gupta
09/21/2020 - 16:33
a
9720
10
Rakhi Gupta's picture
Rakhi Gupta
09/21/2020 - 16:33
a
9718
10
Rakhi Gupta's picture
Rakhi Gupta
09/21/2020 - 15:34
a
9716
10
Apurba nandy's picture
Apurba nandy
03/01/2020 - 20:16
a
8914
10
Apurba nandy's picture
Apurba nandy
03/01/2020 - 20:32
b
8924
5
Apurba nandy's picture
Apurba nandy
03/01/2020 - 20:47
c
8948
5
Kamrunnahar Takia's picture
Kamrunnahar Takia
03/01/2020 - 20:16
a
8908
10
Kamrunnahar Takia's picture
Kamrunnahar Takia
03/01/2020 - 20:32
b
8932
5
Kamrunnahar Takia's picture
Kamrunnahar Takia
03/01/2020 - 20:48
c
8954
5
Md Ishtiak Isty's picture
Md Ishtiak Isty
03/01/2020 - 20:16
a
8904
10
Md Ishtiak Isty's picture
Md Ishtiak Isty
03/01/2020 - 20:34
b
8934
5