BUSF_A01.qxd

Problems

Calculate:

(a) the net present value for both projects.

(b) the approximate internal rate of return for Project A.

(c) the payback period for both projects.

4.3*Turners Ltd is considering the purchase of a new machine that is expected to save
labour on an existing project. The estimated data for the two machines available on the
market are as follows:

Machine A Machine B

£000 £000

Initial cost (year 0) 120 120

Residual value of machines (Year 5) 20 30

Annual labour cost savings:

Year 1 40 20

24030

34050

42070

54050

Which machine will be selected under the following criteria?

(a) NPV, assuming a cost of finance of 10 per cent p.a.

(b) IRR

(c) ARR

(d) PBP.

Ignore taxation throughout, and treat the savings as if they will occur at the end of the

Relevant website

4.4 RTB plc has recently assessed a potential project to make and sell a newly developed
product. Two possible alternative systems have been identified, either one of which
could be used to make the product. The results of the assessment can be summarised
as follows:

Initial

NPV IRR investment

£m % £m

Using System A 4.0 16 4.0

Using System B 6.0 13 6.0

The business’s cost of finance is 10 per cent p.a.

Which system should the business select?

Explain what assumptions you have made about the business and your reasons for the

selection made.

4.5*Cantelevellers plc’s primary financial objective is to maximise the wealth of its share-
holders. The business specialises in the development and assembly of high quality tele-
vision sets. It normally subcontracts manufacture of the components of each set,
carrying out the final assembly itself. ‘