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    Lectorial and Tutorial Q Scots and Abishot

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    Lê Quốc Triệu

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    Lectorial and Tutorial Q Scots and Abishot

    Uploaded by

    Lê Quốc Triệu
    17 views2 pages

    Original Title

    Lectorial and tutorial Q Scots and Abishot (1)

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    17 views2 pages

    Lectorial and Tutorial Q Scots and Abishot

    Uploaded by

    Lê Quốc Triệu

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 2

    Lectorial and tutorial

    Scots Plc has to select one of two mutually exclusive investment projects. Both
    would involve purchase of machinery with a life of four years.

    Project 1’s machinery would cost £750,000 and have an estimated residual
    value of £150,000. Initial investment in working capital would be £200,000.
    Fixed costs are £200,000 pa, selling price is £100/unit and variable costs are
    £40/unit. Demand in years 1-4 is expected to be 10,000, 10,100, 10,250 and
    10,000 units respectively.

    Project 2’s machinery would cost £1,300,000 and have an estimated residual
    value of £300,000. Initial investment in working capital would be £400,000.
    Fixed costs are £200,000 pa, selling price is £200/unit and variable costs are
    £50/unit. Demand in years 1-4 is expected to be 5,000, 5,100, 5,100 and 5,000
    units respectively.

    The company uses the straight-line method for providing for annual
    depreciation. Assume that annual cash flows arise on the anniversaries of the
    initial outlay, that there will be no price changes over the project lives and that
    100% of the working capital would be recovered at the end of each project.

    Required:

    Calculate for each project:

    a) the accounting rate of return.


    b) the payback period.
    Abishot Ltd is looking to expand into the market of designer kitchen
    cupboards. The company’s investment managers have come up with three
    possible capital expenditure projects.

    Project One entails the purchase of plant and machinery that would allow the
    company to produce kitchen cupboards itself. Project Two involves the
    acquisition of a competing cupboard manufacturer, and Project Three
    comprises a joint venture with another company that is looking to expand into
    the same market. Because of capital rationing, only one project can be
    accepted.

    If Project One is preferred over the others, the machinery will cost £200,000
    and is expected to have a useful life of 5 years, at the end of which it can be
    disposed of for £10,000.

    The competitor, KitCup Ltd, can be acquired for £230,000. This investment is
    going to be held for a period of 5 years, when Abishot will sell KitCup Ltd for
    £15,000.

    The joint venture option will require an investment of £180,000 by Abishot Ltd
    and the resulting company can be sold after 4 years for the price of £16,000,
    half of which will be paid to Abishot Ltd.

    The expected cash flows for each project are as follows:

    Project
    One Two Three
    Expected Cash
    Inflows (£) (£) (£)
    End Year 1 80,000 100,000 55,000
    2 70,000 70,000 65,000
    3 65,000 50,000 95,000
    4 60,000 50,000 100,000
    5 55,000 100,000 --

    Required:

    Calculate the payback period and Accounting Rate of Return (ARR) for each
    project.

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