Your company is considering investing in its own transport fleet. The present position is that carriage is
Question:
Other costs include depreciation. It is projected that the fleet would be sold for £150 000 at the end of year 5. It has been agreed to depreciate the fleet on a straight line basis.
To raise funds for the project your company is proposing to raise a long-term loan at 12 per cent interest rate per annum.
You are told that there is an alternative project that could be invested in using the funds raised, which has the following projected results:
Payback = 3 years
Accounting rate of return = 30%
Net present value = £140 000.
As funds are limited, investment can only be made in one project.
The transport fleet would be purchased at the beginning of the project and all other expenditure would be incurred at the end of each relevant year.
Required:
(a) Prepare a table showing the net cash savings to be made by the firm over the life of the transport fleet project.
(b) Calculate the following for the transport fleet project:
(i) Payback period
(ii) Accounting rate of return
(iii) Net present value
(c) Write a short report to the investment manager in your company outlining whether investment should be committed to the transport fleet or the alternative project outlined. Clearly state the reasons for your decision.
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What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
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