Sky Limited is going into the manufacture of a Smart Vehicle Tracking Device (SVTD) particularly designed...
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Sky Limited is going into the manufacture of a Smart Vehicle Tracking Device (SVTD) particularly designed for tracking commercial vehicles such as lorries and trucks and has identified two potential machines that could be used to produce it. The Finance Manager has produced for the board the following potential cash flows from operating either machine. Year 124410 3 5 Capital Outlay Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Residual Value The company has a cost of capital of 11% Machine A £'000 -4,200 1,200 1,300 1,000 1,400 1,100 700 Machine B £'000 -4,800 1,100 1,400 1,200 1,000 1,300 900 Required a) Calculate the Payback period for each of the machines identify which should be invested in and explain why. (3 Marks) b) Calculate the Accounting rate of return for each machine and identify which should be invested in and explain why. c) Calculate the Net Present Value of each machine and identify which should be invested in and explain why. (3 Marks) (5 Marks) d) The Marketing Director believes that the production of this new SVTD is riskier and hence believes that the firm should not be discounting at the Cost of Capital but should add a 5% risk factor to it and discount at the Hurdle Rate of 16%. Recalculate the NPV for each machine utilising this new hurdle rate identify which should be invested in and explain why. Sky Limited is going into the manufacture of a Smart Vehicle Tracking Device (SVTD) particularly designed for tracking commercial vehicles such as lorries and trucks and has identified two potential machines that could be used to produce it. The Finance Manager has produced for the board the following potential cash flows from operating either machine. Year 124410 3 5 Capital Outlay Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Residual Value The company has a cost of capital of 11% Machine A £'000 -4,200 1,200 1,300 1,000 1,400 1,100 700 Machine B £'000 -4,800 1,100 1,400 1,200 1,000 1,300 900 Required a) Calculate the Payback period for each of the machines identify which should be invested in and explain why. (3 Marks) b) Calculate the Accounting rate of return for each machine and identify which should be invested in and explain why. c) Calculate the Net Present Value of each machine and identify which should be invested in and explain why. (3 Marks) (5 Marks) d) The Marketing Director believes that the production of this new SVTD is riskier and hence believes that the firm should not be discounting at the Cost of Capital but should add a 5% risk factor to it and discount at the Hurdle Rate of 16%. Recalculate the NPV for each machine utilising this new hurdle rate identify which should be invested in and explain why. Sky Limited is going into the manufacture of a Smart Vehicle Tracking Device (SVTD) particularly designed for tracking commercial vehicles such as lorries and trucks and has identified two potential machines that could be used to produce it. The Finance Manager has produced for the board the following potential cash flows from operating either machine. Year 124410 3 5 Capital Outlay Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Residual Value The company has a cost of capital of 11% Machine A £'000 -4,200 1,200 1,300 1,000 1,400 1,100 700 Machine B £'000 -4,800 1,100 1,400 1,200 1,000 1,300 900 Required a) Calculate the Payback period for each of the machines identify which should be invested in and explain why. (3 Marks) b) Calculate the Accounting rate of return for each machine and identify which should be invested in and explain why. c) Calculate the Net Present Value of each machine and identify which should be invested in and explain why. (3 Marks) (5 Marks) d) The Marketing Director believes that the production of this new SVTD is riskier and hence believes that the firm should not be discounting at the Cost of Capital but should add a 5% risk factor to it and discount at the Hurdle Rate of 16%. Recalculate the NPV for each machine utilising this new hurdle rate identify which should be invested in and explain why. Sky Limited is going into the manufacture of a Smart Vehicle Tracking Device (SVTD) particularly designed for tracking commercial vehicles such as lorries and trucks and has identified two potential machines that could be used to produce it. The Finance Manager has produced for the board the following potential cash flows from operating either machine. Year 124410 3 5 Capital Outlay Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Residual Value The company has a cost of capital of 11% Machine A £'000 -4,200 1,200 1,300 1,000 1,400 1,100 700 Machine B £'000 -4,800 1,100 1,400 1,200 1,000 1,300 900 Required a) Calculate the Payback period for each of the machines identify which should be invested in and explain why. (3 Marks) b) Calculate the Accounting rate of return for each machine and identify which should be invested in and explain why. c) Calculate the Net Present Value of each machine and identify which should be invested in and explain why. (3 Marks) (5 Marks) d) The Marketing Director believes that the production of this new SVTD is riskier and hence believes that the firm should not be discounting at the Cost of Capital but should add a 5% risk factor to it and discount at the Hurdle Rate of 16%. Recalculate the NPV for each machine utilising this new hurdle rate identify which should be invested in and explain why.
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Answer rating: 100% (QA)
SOLUTION a Payback Period Machine A Payback period 2 years 2000 1200 800 1100 Machine B Payback period 4 years 2000 1100 900 1100 Therefore Machine A has a shorter payback period and should be investe... View the full answer
Related Book For
Financial and Managerial Accounting
ISBN: 978-1285866307
13th edition
Authors: Carl S. Warren, James M. Reeve, Jonathan Duchac
Posted Date:
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