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Darn Co has undertaken market research at a cost of $200,000 in order to forecast future cash flows of an investment project with an expected life of four years, as follows:

Year  1 2 3 4
  $'000 $'000 $'000 $'000
Sales revenue              1,250               2,570            6,890       4,530
Costs                  500               1,000            2,500       1,750

 

These forecast cash flows are before taking account of general inflation of 4.7% per year. The capital cost of the investment project, payable at the start of the first year, will be $2,000,000. The investment project will have zero scrap value at the end of the fourth year. The level of working capital investment at the start of each year is expected to be 10% of the sales revenue in that year.

Tax allowable depreciation would be available on the capital cost of the investment project on a 25% reducing balance basis. Darn Co pays tax on profits at an annual rate of 30% per year, with tax being paid one year in arrears. Darn Co has a nominal (money term) after-tax cost of capital of 12% per year.

Requirements:

a

Calculate the net present value of the investment project in nominal terms and comment on its financial acceptability.

Marks: 10
b

Discuss the problems faced when undertaking investment appraisal in the following areas and comment on how these problems can be overcome:

(i) Assets with replacement cycles of different lengths

(ii) An investment project has several internal rates of returns

Marks: 5
c

'Despite the theoretical limitations of the payback method of investment appraisal, it is the method most used in practice.'

Discuss above statement briefly.

Marks: 5

Answers submitted

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Rakhi Gupta's picture
Rakhi Gupta
10/26/2020 - 08:14
a
9914
10
Rakhi Gupta's picture
Rakhi Gupta
10/26/2020 - 08:35
b
9918
5
Rakhi Gupta's picture
Rakhi Gupta
10/26/2020 - 08:52
c
9920
5
Rakhi Gupta's picture
Rakhi Gupta
10/09/2020 - 13:57
a
9768
10
Rakhi Gupta's picture
Rakhi Gupta
10/09/2020 - 14:34
b
9770
5
Rakhi Gupta's picture
Rakhi Gupta
10/09/2020 - 14:41
c
9772
5
Lentle Faith Seakolo's picture
Lentle Faith Seakolo
03/23/2020 - 21:54
a
9110
10
Lentle Faith Seakolo's picture
Lentle Faith Seakolo
03/23/2020 - 21:51
a
9108
10
Lentle Faith Seakolo's picture
Lentle Faith Seakolo
03/23/2020 - 21:40
b
9104
5
Lentle Faith Seakolo's picture
Lentle Faith Seakolo
03/23/2020 - 21:43
c
9106
5
Apurba nandy's picture
Apurba nandy
03/01/2020 - 13:12
a
8896
10
Apurba nandy's picture
Apurba nandy
12/03/2019 - 09:08
a
8350
10
Apurba nandy's picture
Apurba nandy
12/03/2019 - 09:03
a
7984
10
Apurba nandy's picture
Apurba nandy
11/13/2019 - 20:52
a
6348
10
Apurba nandy's picture
Apurba nandy
11/13/2019 - 21:39
b
7996
5
Apurba nandy's picture
Apurba nandy
11/13/2019 - 21:48
c
8010
5
Masum Billah's picture
Masum Billah
11/13/2019 - 21:28
a
7992
10