GreenFuel Ltd has outgrown its current site due to the demand for electric cars. A decision has
Question:
GreenFuel Ltd has outgrown its current site due to the demand for electric cars. A decision has already been made that the company wishes to expand in line with demand and has found two sites that would be suitable for their expansion plans, Site A and Site B. At the moment both sites would need a considerable investment to ensure they are able to provide all of the requirements for their customers.
The following table summarises the initial investment required, as well as the net cash inflows for years 1-5.
Project Net Cash Flows (£) | ||
---|---|---|
Year | Site A | Site B |
0 | (315,000) | (270,000) |
1 | 125,000 | 110,000 |
2 | 98,000 | 100,000 |
3 | 57,000 | 85,000 |
4 | 81,000 | 60,000 |
5 | 98,000 | 74,000 |
5 | 80,000 | 70,000 |
The company applies a straight-line method of depreciation, in line with the company's policy over five years. The company's cost of capital is 15%. It is assumed the residual value for Site A will be £80,000 at the end of the 5 years, while for Site B it will be £70,000.
a. Calculate the net present value (NPV) and internal rate of return (IRR) of the proposed two sites. You are required to show all your workings to support your answers. (Note: Use the interpolation formula to work out the IRR, rather than the Excel's IRR function). (12 marks)
b. Which site should GreenFuel Ltd invest in? Why? (3 marks)
c. IRR is a popular investment appraisal technique. Discuss the advantages and disadvantages of this method
Management Accounting
ISBN: 9780730369387
4th Edition
Authors: Leslie G. Eldenburg, Albie Brooks, Judy Oliver, Gillian Vesty, Rodney Dormer, Vijaya Murthy, Nick Pawsey