BUSF_A01.qxd

Appendix 4 • Suggested answers to selected problem questions

The IRR of Machine A lies below 20 per cent, but above 10 per cent. That of Machine B

is just above 20 per cent. Further trials using other discount rates could be under-

taken. Alternatively, a short cut can be made to a reasonable approximation, i.e. linear

interpolation.

(c) ARR

Machine A Machine B

£ 000 £ 000

Outlay 120 120

Total return over years 1 to 5 180 220

Surplus for 5 years 60 100

ARR =Surplus/5 12 20

ARR =(as percentage of outlay) 10% 16.7%

Machine B would be selected, as the ARR (accounting rate of return) is higher.

(d) PBP

Machine A Machine B

£ 000 £ 000

Outlay 120 120

Payback period 3 years 3 years, 104 days

Machine A would be selected, as the initial outlay is repaid in a shorter period.

4.5 Cantelevellers plc

20X3 20X4 20X5 20X6 20X7 20X8

£ 000 £ 000 £ 000 £ 000 £ 000 £ 000

Capital cost and proceeds (5,000) 1,000

Sales revenue 3,000 3,000 3,000 3,000 3,000

Material cost (see workings) (510) (620) (570) (570) (570)

Lease payments (450) (450) (450) (450) (450)

Redundancy payments 250 (300)

Staff costs (200) (200) (200) (200) (200)

Overheads (200) (200) (200) (200) (200)

(5,200) 1,640 1,530 1,580 1,580 2,730

Discount factor 1.000 0.870 0.756 0.658 0.572 0.497

Present values (5,200) 1,426.8 1,156.7 1,039.6 903.8 1,356.8

Net present value £683.7

On the basis of the project’s NPV, the project should be undertaken.

BUSF_Z03.qxd 11/19/08 10:33 Page 480