Question 11 mark
A £100,000 project returns £30,000, £40,000, £40,000 and £40,000 in years 1 to 4. What is its payback period?
3.3.2 · Decision-making techniques
Investment appraisal
Question 21 mark
The same project's total inflows are £150,000 over 4 years on a £100,000 cost. What is its ARR?
Question 31 mark
A cash inflow of £50,000 arrives in year 2. The discount factor is 0.826. What is its present value?
Question 41 mark
A project has a negative NPV at the firm's discount rate. What does this mean?
Question 51 mark
Which is the main advantage of payback?
Question 61 mark
Which is the main weakness of ARR?
Question 71 mark
A £30,000 machine brings in £12,000 a year for 3 years. At 10%, the discount factors are 0.909, 0.826 and 0.751. What is its NPV?
Question 81 mark
Why might a firm choose a project with a lower NPV?
Question 91 mark
Which is a qualitative factor in an investment decision?
Question 101 mark
Why are forecast cash flows a risk in investment appraisal?
Case study 150 marks
Crumb & Co
Crumb & Co is a family bakery supplying 70 cafés in Manchester. Demand is growing, and it can't bake enough croissants at peak times. It is choosing between two investments.
Extract A: Two investments
| Cost now | Year 1 | Year 2 | Year 3 | Year 4 | |
|---|---|---|---|---|---|
| A: automated oven line | 120,000 | 45,000 | 45,000 | 45,000 | 45,000 |
| B: second bakery unit | 110,000 | 30,000 | 40,000 | 50,000 | 60,000 |
Extract B: Other information
At a 10% discount rate the discount factors for years 1 to 4 are 0.909, 0.826, 0.751 and 0.683. The oven line would need four fewer bakers on the night shift. The second unit would need eight new staff, and the lease runs for 10 years. The family has £60,000 in the bank and would borrow the rest.
(a) Calculate4 marks
Using Extract A, calculate the average rate of return (ARR) for investment A.
(b) Explain4 marks
Explain one limitation of using payback to compare the two investments.
0 words
(c) Assess10 marks
Assess the usefulness of net present value when Crumb & Co compares the two investments.
0 words
(d) Assess12 marks
Assess the non-financial factors Crumb & Co should consider before choosing an investment.
0 words
(e) Evaluate20 marks
Crumb & Co could invest in the automated oven line (A) or the second bakery unit (B). Evaluate these two options and recommend which it should choose.
0 words