ABC plc is a UK-based company that operate countrywide mobile phone and wireless internet networks. In...

 

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ABC plc is a UK-based company that operate countrywide mobile phone and wireless internet networks. In recent years, the company has become aware of its corporate image and reputation with highly visible news pieces alleging various pollutions to be caused by the industry. The company directors know that environmental issues become a concern to its customers, investors, and other key stakeholders. In the first stage of initiatives, the business is contemplating moving to renewable energy sources for its head office buildings. This involves substantial up-front investment in solar panels and a medium-size wind turbine to generate the required energy. As well as the environmental and spin-off reputational advantages, the directors trust that the investment will provide the business with significant financial returns. The renewable sources will significantly reduce utility costs; surplus. energy can be sold to the national grid. The directors, however, expect that the technology would become obsolete and not worth maintaining after five years. The financial manager has been asked to assess this environmental capital investment. Cash flow forecasts are provided as follows. Details Year 0 Initial investment in solar panels and wind turbine Projected cash savings on utilities and selling to the grid: 1 2 5 Additional scrap income from the redundant equipment 5 The financial manager has concluded that the appropriate discount factor for an investment with this type of risk is 8%. Required: a) Calculate and explain the meaning of the payback period for the investment and compare to a company benchmark of 4 years. Describe the pros and cons of this. technique. (10 marks) b) Calculate the Net Present Value (NPV) of the project and explain why this investment is either viable or not. Describe the advantages of using NPV to value investments. (15 marks) c) The financial manager has decided that it would be prudent to assess a worst-case scenario and has concluded that under worst-case economic conditions the following would happen: the initial investment would increase to £2,100,000 and there would be EO scrap from the redundant equipment. Calculate the NPV of this scenario. (10 marks) d) A sensitivity chart has been drawn up for an alternative environmental project (involving the installation of more energy-efficient infrastructure). Three variables are analysed, including cash savings, discount factor, and initial investment. Assess 롤 3 4 the risk and returns of the investment and describe the pros and cons of sensitivity analysis. (15 marks) -30 -20 P SENSITIVITY ANALYSIS 50000 40000 30000 -20000 222 10000 AN 40000 20000 30000 40000 % CHANGE IN VARIABLE 10 Amount £2,000,000 E420,000 £570,000 £840,000 £400,000 £250,000 £125,000 20 30 DISCOUNT INVEST --SAVINGS ABC plc is a UK-based company that operate countrywide mobile phone and wireless internet networks. In recent years, the company has become aware of its corporate image and reputation with highly visible news pieces alleging various pollutions to be caused by the industry. The company directors know that environmental issues become a concern to its customers, investors, and other key stakeholders. In the first stage of initiatives, the business is contemplating moving to renewable energy sources for its head office buildings. This involves substantial up-front investment in solar panels and a medium-size wind turbine to generate the required energy. As well as the environmental and spin-off reputational advantages, the directors trust that the investment will provide the business with significant financial returns. The renewable sources will significantly reduce utility costs; surplus. energy can be sold to the national grid. The directors, however, expect that the technology would become obsolete and not worth maintaining after five years. The financial manager has been asked to assess this environmental capital investment. Cash flow forecasts are provided as follows. Details Year 0 Initial investment in solar panels and wind turbine Projected cash savings on utilities and selling to the grid: 1 2 5 Additional scrap income from the redundant equipment 5 The financial manager has concluded that the appropriate discount factor for an investment with this type of risk is 8%. Required: a) Calculate and explain the meaning of the payback period for the investment and compare to a company benchmark of 4 years. Describe the pros and cons of this. technique. (10 marks) b) Calculate the Net Present Value (NPV) of the project and explain why this investment is either viable or not. Describe the advantages of using NPV to value investments. (15 marks) c) The financial manager has decided that it would be prudent to assess a worst-case scenario and has concluded that under worst-case economic conditions the following would happen: the initial investment would increase to £2,100,000 and there would be EO scrap from the redundant equipment. Calculate the NPV of this scenario. (10 marks) d) A sensitivity chart has been drawn up for an alternative environmental project (involving the installation of more energy-efficient infrastructure). Three variables are analysed, including cash savings, discount factor, and initial investment. Assess 롤 3 4 the risk and returns of the investment and describe the pros and cons of sensitivity analysis. (15 marks) -30 -20 P SENSITIVITY ANALYSIS 50000 40000 30000 -20000 222 10000 AN 40000 20000 30000 40000 % CHANGE IN VARIABLE 10 Amount £2,000,000 E420,000 £570,000 £840,000 £400,000 £250,000 £125,000 20 30 DISCOUNT INVEST --SAVINGS

Answer rating: 100% (QA)

Answer a The payback period is the time it takes to repay the original investment in the project It ... View the full answer