As a Neptune Holdings Plc junior management accountant, the Finance Director wants your calculations and recommendation regarding an expansion plan the Board is considering, which includes a chain of factory outlet stores. Below are the figures for the first one that is planned for a central Manchester location next year. Company policy dictates that any decision should be based on the results of calculating Net Present Value (NPV) of 3 years of cash flows using a cost of capital of 12%, Payback Period (PBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a 5% cushion in case of increases in inflation or interest rates. The initial investment investment consists of £100,000 for the land, building costs of £158,000, and £36,600 for fittings and equipment. The cash flows in year 1 are expected to be: 

total sales revenue £600,600; 

the cost of Alpha products sold £165,900;

 Beta stock sold £118,860; 

staff costs £24,780;

 light & heat £35,196;

 other overheads £134,904. 

The cash flows for years 2 and 3 are the same as those in the first year, however expected increase by 2% inflation each year.

Requirements

Using the information above and in accord with the above stated company policy you are required to calculate:

1. Net Present Value (NPV)
2. Payback period (PBP) and Discounted Payback Period (DPBP)
3. Internal Rate of Return
4. Based on above calculations do you recommend the investment is made and the new outlet store is built?

Critically discuss the limitations of the above project appraisal techniques used and any other recommendations on issues the board that must be considered before making final investment decision .

Answer rating: 100% (QA)

1 ANSWER Net Present Value NPV To calculate NPV we need to find the present value of all cash inflows and outflows of the project discounted at the cost of capital 12 Year 0 Initial investment 295600 ... View the full answer