Investment Appraisal

VIP Co | ACCA Specimen (CBE)

Vip Co, a large stock-exchange listed company, is evaluating an investment proposal to manufacture Product W33, which has performed well in test marketing trials conducted recently by the company's research and development division. Product W33 will be manufactured using a fully-automated process which would significantly increase noise levels from Vip Co's factory. The following information relating to this investment proposal has now been prepared:

 

Initial investment

$2 million

Sico Co (6/08, amended*)

Sico Co is evaluating the purchase of a new machine to produce product M, which has a short product life-cycle due to rapidly changing technology. The machine is expected to cost $3.5m. Production and sales of product M are forecast to be as follows:

Darn Co

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:

Hraxin Co (6/15, amended)

Hraxin Co is appraising an investment project which has an expected life of four years and which will not be repeated. The initial investment, payable at the start of the first year of operation, is $5 million. Scrap value of $500,000 is expected to arise at the end of four years.

There is some uncertainty about what price can be charged for the units produced by the investment project, as this is expected to depend on the future state of the economy. The following forecast of selling prices and their probabilities has been prepared:

Uftin Co (12/14, Amended)

Uftin Co is a large company which is listed on a major stock market. The company has been evaluating an investment proposal to manufacture Product K3J. The initial investment of $1,800,000 will be payable at the start of the first year of operation. The following draft evaluation has been prepared by a junior employee.

BQK Co (12/12, Amended)

BQK Co, a house-building company, plans to build 100 houses on a development site over the next four years. The purchase cost of the development site is $4,000,000, payable at the start of the first year of construction. Two types of house will be built, with annual sales of each house expected to be as follows:

Warden Co (12/11, amended)

Warden Co plans to buy a new machine. The cost of the machine, payable immediately, is $800,000 and the machine has an expected life of five years. Additional investment in working capital of $90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced.

Degnis Co (Mar/June 16, amended)

Degnis

Degnis Co is a company which installs kitchens and bathrooms to customer specifications. It is planning to invest $4,000,000 in a new facility to convert vans and trucks into motorhomes. Each motorhome will be designed and built according to customer requirements.

Degnis Co expects motorhome production and sales in the first four years of operation to be as follows.

Pureit Co*

Pureit Co is a medium-sized, all equity-financed, unquoted company which specializes in the development and production of water- and air-purifying devices to reduce the emission of effluents. Its small but ingenious R & D team has recently made a technological breakthrough which has revealed a number of attractive investment opportunities. It has applied for patents to protect its rights in all these areas. However, it lacks the financial resources required to exploit all of these projects, whose required outlays and post-tax NPVs are listed in the table below.