Chicken Spot sells takeaway chicken and related products. The manager is considering acquiring an advanced new...
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Chicken Spot sells takeaway chicken and related products. The manager is considering acquiring an advanced new oven which will substantially reduce the time required to cook chicken and would also enable the store to diversify into the sale of pizza. The cost of the new oven is $40,000 and it is estimated the oven will be sold for $5,000 at the end of its useful life. Chicken Spot has estimated the oven will have a useful life of three years, and will influence annual cash flows as follows: Year Annual Cash flows Present Value (PV) $19,200 $17,142.86 2 $19,200 $15,306.12 3 $24,200 $17,225.08 ($19,200 cash flow + $5,000 sale of oven) ТOTAL $49,674.06 Chicken Spot management prefer projects with a payback period of less than 3 years. Required (i) Calculate the Net Present Value (NPV) of the project. (2 marks) (ii) Calculate the Payback Period (PP) of the project. (2 marks) (ii) Based on your calculations of NPV and PP, should the management of Chicken Spot proceed with the purchase of the oven? Why? (2 marks) *Students please remember to show all workings to maximise your mark. Part (b) (4 marks) Your friend has a small business that only deals with customers in cash sales. As the business is currently struggling, your friend is considering the option of granting credit to customers and allowing sales to be made via accounts receivable in the hope that it boosts performance. Explain to your friend at least two advantages and two disadvantages of changing from a cash-based business to a business that grants credit to customers and allows sales to be made via accounts receivable. Chicken Spot sells takeaway chicken and related products. The manager is considering acquiring an advanced new oven which will substantially reduce the time required to cook chicken and would also enable the store to diversify into the sale of pizza. The cost of the new oven is $40,000 and it is estimated the oven will be sold for $5,000 at the end of its useful life. Chicken Spot has estimated the oven will have a useful life of three years, and will influence annual cash flows as follows: Year Annual Cash flows Present Value (PV) $19,200 $17,142.86 2 $19,200 $15,306.12 3 $24,200 $17,225.08 ($19,200 cash flow + $5,000 sale of oven) ТOTAL $49,674.06 Chicken Spot management prefer projects with a payback period of less than 3 years. Required (i) Calculate the Net Present Value (NPV) of the project. (2 marks) (ii) Calculate the Payback Period (PP) of the project. (2 marks) (ii) Based on your calculations of NPV and PP, should the management of Chicken Spot proceed with the purchase of the oven? Why? (2 marks) *Students please remember to show all workings to maximise your mark. Part (b) (4 marks) Your friend has a small business that only deals with customers in cash sales. As the business is currently struggling, your friend is considering the option of granting credit to customers and allowing sales to be made via accounts receivable in the hope that it boosts performance. Explain to your friend at least two advantages and two disadvantages of changing from a cash-based business to a business that grants credit to customers and allows sales to be made via accounts receivable.
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Related Book For
Canadian Income Taxation planning and decision making
ISBN: 9781259094330
17th edition 2014-2015 version
Authors: Joan Kitunen, William Buckwold
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