Pool plc is currently planning to buy a new machine which will cost £165,000. It is expected to generate new cash sales of £175,000 per year. The machine will be used for 5 years and at the end of this period it will be scrapped and not replaced. The scrap value of the machine is expected to be £20,000. Initial investment in working capital of £15,000 will also be needed. Annual material and operating costs are estimated to be £105,000 per year. 

Pool plc uses a discount rate of 10% in the investment appraisal process. The company has a target Return on Capital Employed (ROCE) of 30% per year, a minimum acceptable PI ratio of 1.6 and a maximum payback period of 2.5 years. Ignore taxation.

Required: 

1)Payback period 

2)Return on Capital Employed (accounting rate of return)

3)Net Present Value

4)IRR (use 10% and 20%)

Answer rating: 100% (QA)

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