Secreto Pte Ltd (‘Secreto’) manufactures and sells ergonomic gaming chairs.

Secreto is evaluating whether to invest in a new equipment. Secreto’s cost of capital is 5% per annum.

The table below shows the relevant cash flow of the above investment.

Year	Cash Flow
0	-$4,180,000
1	$1,049,200
2	$1,621,500
3	$2,028,600

Calculate the Discounted Payback Period and determine whether Secreto should invest in the new equipment if the required payback period is 2.50 years. Explain your answer clearly and show all relevant workings, rounded off to 2 decimal places.

[8 marks]

Calculate Secreto’s cost of equity given the following information:

• Risk-free rate is 2% per annum

• Secreto’s Beta is 1.8

• Return on the market portfolio is 6% per annum

Assuming that the Internal Rate of Return (‘IRR’) on the above investment is 5.49% and the investment is 100% financed by equity, determine whether Secreto should invest in the new equipment. Show all relevant workings clearly.

[5 marks]

(c) Secreto expects to sell 40,000 gaming chairs in the year 2023. It pays $10 to store each gaming chair in a warehouse for a year and $20 for every order placed to the supplier of the gaming chair. The company maintains a safety stock of 2,500 gaming chairs.

Calculate the following:

(i) the economic order quantity,

(ii) the reorder point, assuming the supplier requires 8 days lead time to deliver an order.

Show your workings clearly.

[6 marks]

Answer rating: 100% (QA)

Part 1 To calculate the Discounted Payback Period DPP we need to determine the present value of the ... View the full answer