jessyjessy23
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Engen-Auto Limited (Ltd) is a manufacturer of automotive engine parts. The company is considering upgrading its machinery. The financial details of the investment proposal are as follows: Cost of equipment 2 000 000
Import duty 450 000
Installation cost 125 000
Net cash flows Year 1-9 800 000 per annum
Year 10 375 000
Residual/scrap value (end of year 10) 525 000
The company uses straight-line depreciation. The cost of capital for projects of similar risk is 20%.
Ignore taxation.
Required:
2.1 Calculate 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 35%.
2.3 Assume a payback period of 4 years. Determine the payback period and state if the investment is acceptable or not.
2.4 Calculate and comment on the viability of the proposed investment based on the net present value (NPV) method.
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JenBl
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(Original post by jessyjessy23)
Engen-Auto Limited (Ltd) is a manufacturer of automotive engine parts. The company is considering upgrading its machinery. The financial details of the investment proposal are as follows: Cost of equipment 2 000 000
Import duty 450 000
Installation cost 125 000
Net cash flows Year 1-9 800 000 per annum
Year 10 375 000
Residual/scrap value (end of year 10) 525 000
The company uses straight-line depreciation. The cost of capital for projects of similar risk is 20%.
Ignore taxation.
Required:
2.1 Calculate 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 35%.
2.3 Assume a payback period of 4 years. Determine the payback period and state if the investment is acceptable or not.
2.4 Calculate and comment on the viability of the proposed investment based on the net present value (NPV) method.
For a small fee i can assist you.
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natninja
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(Original post by jessyjessy23)
Engen-Auto Limited (Ltd) is a manufacturer of automotive engine parts. The company is considering upgrading its machinery. The financial details of the investment proposal are as follows: Cost of equipment 2 000 000
Import duty 450 000
Installation cost 125 000
Net cash flows Year 1-9 800 000 per annum
Year 10 375 000
Residual/scrap value (end of year 10) 525 000
The company uses straight-line depreciation. The cost of capital for projects of similar risk is 20%.
Ignore taxation.
Required:
2.1 Calculate 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 35%.
2.3 Assume a payback period of 4 years. Determine the payback period and state if the investment is acceptable or not.
2.4 Calculate and comment on the viability of the proposed investment based on the net present value (NPV) method.
2.1 So accounting rate of return is the average profit divided by the average investment. Average profit will be the sum of the cashflows less the depreciation (assume no profit on disposal) divided by the number of years. Average investment will be the average of the initial investment and the scrap value.
2.2. Essentially whether or not the ARR is greater or less than the target rate of return.
2.3 Just divide the cost by the annual cash flow (it's the same in all years) to calculate how many years it takes to get the cash back - if it's more than 4 years that's too long.
2.4 If you have a financial calculator or excel there's a function for this. It's the sum of the cash flows discounted at the cost of capital of 20%. If it is greater than zero the project is profitable taking into account the time value of money.
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