Accounting Business Reporting for Decision Making

526 Accounting: Business Reporting for Decision Making

Required

a. What is the PP for the taxi venture?

b. If Ben allows $81 600 as his own driver’s wage in his calculations, and he could earn 10 per

cent elsewhere on his funds, what is the NPV for the project?

c. In your own words, what does this NPV tell us?

d. What are the IRRs (i) with no wage allowance for himself and (ii) after allowing for the wage?

12.32 Deciding on a finance package    LO5

Ingrid has just started a new IT business and is thinking of leasing a luxury new car. She has her

sights on a BMW coupe. A lease company offers her a deal which comprises a $35 200 payment

on delivery of the vehicle, a $21 100 payment at the end of year 1, a $24 600 payment at the end

of year 2 and a $31 700 payment at the end of year 3. If Ingrid wants to take over the ownership

of the vehicle, she must pay another $35 200 at the end of year 3. The lease provider states the

interest rate it has charged is 16 per cent. Ignore taxation.

Required

a. From these data, calculate the total price of the new vehicle.

b. If the price of the new vehicle were $54 600, what is the implied interest rate for the lease?

c. If the price of the new vehicle were $47 500, what is the implied interest rate for the lease?

12.33 Deciding between three projects    LO2, 3, 4, 5

The directors of Indratno and Felix, a partnership of investors, have three independent investment pro-

jects before them for consideration. Each will cost $400 000 in the first instance. The net cash inflows

in thousands of dollars each year of the projects are projected to be as in the following table. There is

thought to be no residual value for any of the projects. The directors work on 10 per cent as being their

RRR. Ignore taxation effects and assume all cash flows occur at the end of the relevant years.

Year A B C

1 120 100 100

2 160 220 180

3 200 180 220

4 160 180 140

Required

a. Calculate the four investment appraisal measures for each project.

b. Rank the projects and advise the directors which projects, if any, to accept and give your

reasons.

12.34 Deciding between three projects    LO2, 3, 4, 5

A company owned exclusively by residents in the Queensland coastal community of Noosa are

offered three projects for which the cash flows are as follows in thousands of dollars. The directors

work on 12 per cent as their RRR. Assume all cash flows occur at the end of the relevant years. There

are no salvage values factored into the expected cash flows, and no salvage values are expected.

Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

A − 400 200 160 200 120 40

B − 300 80 80 140 160 160

C − 320 400 20 20 20 280

Required

a. Calculate the four investment appraisal measures for each project.

b. Rank the projects and advise the directors which projects, if any, to accept. Give your reasons.