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Investment Appraisal 2022 Test

The document outlines investment appraisals for two projects (A and B) and two machines (A and B) that a company is considering. It provides cash flow details, cost of capital, and asks for calculations including payback period, net present value, and internal rate of return. Additionally, it seeks recommendations on which project or machine to undertake based on the calculations and discusses the disadvantages of certain appraisal techniques.

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sirdarmukodzani
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34 views2 pages

Investment Appraisal 2022 Test

The document outlines investment appraisals for two projects (A and B) and two machines (A and B) that a company is considering. It provides cash flow details, cost of capital, and asks for calculations including payback period, net present value, and internal rate of return. Additionally, it seeks recommendations on which project or machine to undertake based on the calculations and discusses the disadvantages of certain appraisal techniques.

Uploaded by

sirdarmukodzani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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MR KAYBEE

INVESTMENT APPRAISALS

TEST ONE

1. A company is investigating the feasibility of two projects A and B wih the following cash
flows:
Project A Project B
$ $
Initial Investment 20 000 30 000
Year 1 8 000 15 000
2 4 000 7 000
3 5 000 8 000
4 5 000 12 000
5 6 000

The company’s cost of capital is 10%

Discount factors at:


10% 15%
Year 1 0.909 0.870
Year 2 0.826 0.756
Year 3 0.751 0.658
Year 4 0.683 0.572
Year 5 0.621 0.497

For both projects, calculate the following:


a) Payback period, [6]
b) Net present value, [10]
c) Internal rate of return, correct to two decimal places. [6]
d) Advise this company with reasons which project should be undertaken using
calculations in (c) above. [2]
e) What are the key features of the net present value method of investment appraisal [3]

For a service that gives you Honour, Dignity & Comfort contact us on: 071 818 1255 (app)

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MR KAYBEE

2. Mr Kaybee limited is considering purchasing or investing in a new machine, either


machine A or B. However, a condition of capital rationing exists in the company (meaning
due to availability of funds they can either invest in machine A or B and not both) and
hence there is need for capital budgeting appraisal.

Both machines would have an expected life of five years and would be depreciated on a
straight line basis. The following information is available:

Machine A Machine B
$ $
Initial cost 45 000 56 000
Residual value 5 000 6 000

Accounting profits:
Year 1 6 000 5 000
Year 2 7 000 6 000
Year 3 7 000 8 000
Year 4 4 000 7 000
Year 5 3 000 4 000

Mr Kaybee Ltd’s cost of capital is 10% per annum for which discounts factors are:
Year 1 0.909
Year 2 0.826
Year 3 0.751
Year 4 0.683
Year 5 0.621

Required:

(a) For both machines A and B, calculate


i. The accounting rate of return (based on average investment), [4]
ii. Payback period, [4]
iii. Net present value [10]
(b) Recommend with reasons which machine should be purchased. [3]
(c) State the disadvantages of both the accounting rate of return and payback period as
capital investment appraisal techniques. [4]

FOR SOLUTIONS KINDLY APP: 071 818 1255

THANK YOU//SIYABONGA//TINOTENDA//TABOKA

For a service that gives you Honour, Dignity & Comfort contact us on: 071 818 1255 (app)

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