Prospect Limited is considering investing in some new plant. The plant would cost ?1,000,000 to implement, it
Question:
Prospect Limited is considering investing in some new plant. The plant would cost ?1,000,000 to implement, it would last 5 years, and it would then be sold for ?50,000. The relevant profit and loss accounts for each year during the life of the project are as follows:
Additional information:
1. All sales are made and all purchases are obtained on credit terms.
2. Outstanding trade debtors and trade creditors at the end of each year are expected to be as follows:
3. Expenses would all be paid in cash during each year in question.
4. Taxation would be paid on 1 January following each year end.
5. Half the plant would be paid for in cash on 1 April 20X0, and the remaining half (also in cash) on January 20X1. The resale value of ?50,000 will be received in cash on 31 March 20X6.
Requirements:
1) Calculate the annual net cash flow arising from the purchase of this new plant.
a) If the cost of capital is 8%, evaluate the proposed investment using the following techniques: Return on Investment,
2) b) Payback,
c) Return on Investment,
d) Net Present Value,
e) Discounted Net Present Value,
f) Internal Rate of Return.