Pearl Limited is considering upgrading its plant to expand it client base. The financial details of the investment proposal are as follows: Cost of plant R4 700 000 Import duty R 900 000 Installation cost R 450 000 Net cash flows Year 1-8 R1 700 000 per annum (excluding residual value) Residual/scrap value R1 300 000 The company uses straight-line depreciation. The cost of capital for projects of similar risk is 18%. Ignore taxation. Required: 2.1 C alculate the investment’s Accounting Rate of Return (ARR). 2.2 Briefly explain if the ARR is acceptable or not based on a target rate of return of 25%. 2.3 Assume a payback period of 3 years. Determine the

Pearl Limited is considering upgrading its plant to expand it client base. The financial details of the investment proposal are as follows: Cost of plant R4 700 000 Import duty R 900 000 Installation cost R 450 000 Net cash flows Year 1-8 R1 700 000 per annum (excluding residual value) Residual/scrap value R1 300 000 The company uses straight-line depreciation. The cost of capital for projects of similar risk is 18%. Ignore taxation. Required: 2.1 C alculate the investment’s Accounting Rate of Return (ARR). 2.2 Briefly explain if the ARR is acceptable or not based on a target rate of return of 25%. 2.3 Assume a payback period of 3 years. Determine the

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 6P

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Wonder Plc is considering two investment projects in another city and the estimated cash flows are as follows: Year Hotels Housing £ (m) £ (m) (200) (250) 0 Capital outlay Net cash flows 1 130 130 2 60 120 3 80 120 4 100 80 4 Residual value 20 40 The company's cost of capital is 15%. Required: (a) Assess the viability of these two projects using NPV and Payback period as the appraisal techniques and advise Wonder Plc's Board of Directors accordingly
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