Avery Ltd is considering investing in a project that will cost a total of $480,000 and run for 5 years. The project is expected to return $160,000 per annum and have annual costs of $30,000. At the end of the second year, a further $20,000 will need to be spent to keep the project up to date. The company's cost of capital is 8% and they require the project pays for itself in less than 4 years.

 

Should Avery Ltd proceed with the investment?

 Would your answer differ if the cost of capital is 10%? 

1 Periods 1% 2 3 4 01 5 6 7 00 8 Present Value Interest Factor of $1 9 Discount Rate 10 2% 3% 4% 5% 6% 7% 8% 9% 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 10% 0.9091 0.8264 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855