Large Group Ltd is assessing a business investment opportunity. The estimated cash flows for which are...
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Large Group Ltd is assessing a business investment opportunity. The estimated cash flows for which are as follows: Jan. 2023 £400,000 (Initial investment) The net operating annual cash flows arising the last day of the year are as follows: Dec. 2023 £290,000 Dec. 2024 £160,000 Dec. 2025 £200,000 Dec. 2025 £75,000 (Cash inflow from residual value) All the above figures are expressed at 1 January 2023 prices. The business's cost of capital is 9% p.a. Corporate tax is charged on profits at a rate of 25% payable during the year in which the profit is earned (assume that the taxable profit equals the net operating cash flow). The asset will be disposed of in 2025 and doesn't give rise of any capital allowances. Required: (i) (ii) Calculate the discounted payback period, the net present value, and the profitability index of the project. What would you conclude if the maximum acceptable discounted payback period of Large Group Ltd is two and a half years (DPP-2.5)? What are the three main reasons for conflicting rankings that sometimes occur when projects are evaluated with the net present value and internal rate of return capital budgeting techniques? Large Group Ltd is assessing a business investment opportunity. The estimated cash flows for which are as follows: Jan. 2023 £400,000 (Initial investment) The net operating annual cash flows arising the last day of the year are as follows: Dec. 2023 £290,000 Dec. 2024 £160,000 Dec. 2025 £200,000 Dec. 2025 £75,000 (Cash inflow from residual value) All the above figures are expressed at 1 January 2023 prices. The business's cost of capital is 9% p.a. Corporate tax is charged on profits at a rate of 25% payable during the year in which the profit is earned (assume that the taxable profit equals the net operating cash flow). The asset will be disposed of in 2025 and doesn't give rise of any capital allowances. Required: (i) (ii) Calculate the discounted payback period, the net present value, and the profitability index of the project. What would you conclude if the maximum acceptable discounted payback period of Large Group Ltd is two and a half years (DPP-2.5)? What are the three main reasons for conflicting rankings that sometimes occur when projects are evaluated with the net present value and internal rate of return capital budgeting techniques?
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Answer rating: 100% (QA)
To calculate the discounted payback period net present value NPV and profitability index PI of the project we need to discount the cash flows to their present values using the cost of capital Then we ... View the full answer
Related Book For
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
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