SwiftRide Ltd is considering investing 300,000 into a new machine that will enable them to produce electric
Question:
SwiftRide Ltd is considering investing £300,000 into a new machine that will enable them to produce electric scooters over the next 5 years. The company managers have asked for your help to put together a capital expenditure proposal for the new machine and are conscious that they will only get the 'go ahead' to invest if the project has a payback period of less than 5 years, a positive NPV at the most appropriate discount rate and an ARR and IRR of greater than the weighted average cost of capital.
The £300,000 has been borrowed. Two thirds of the £300,000 has come from a bank loan with a return required of 9% and one third of the £300,000 come from equity with a return required of 15%.
The company uses straight line depreciation. The machine will have no scrap value after 5 years.
Year Operating profit £
0 (300,000)
1 55,000
2 75,000
3 92,000
4 125,000
5 85,000
What would be the results of the payback period investment appraisal method and an evaluation of the strengths and weaknesses of this technique?
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw