524 Accounting: Business Reporting for Decision Making
12.19 LO4, 5
Explain with a diagram how NPV and IRR are related for a given project.
12.20 LO4
If a six-year project has an NPV of $800 000, with a 12 per cent discount rate, will the NPV be
higher or lower with a 15 per cent discount rate?
12.21 LO1, 6
List and describe three factors that must be considered with an investment in an overseas airline.
12.22 LO6
Discuss three environmental concerns that could impact on a business manufacturing custom
made dining tables.
12.23 LO6
What is the difference between return and capital growth on an investment? Illustrate with an
example of an investment in a new warehouse.
12.24 LO6
What is the difference between the profitability and liquidity of an investment?
Problems
BASIC | MODERATE | CHALLENGING
12.25 Making an investment decision between two projects LO3, 5
The Greentree Company has two independent projects in which it could invest. The financial
operations manager has completed some analysis and has presented the information to the board.
The board has asked you for advice. The entity’s cost of capital is 15 per cent.Project 23 Project 24
Investment required ($000) 200 400
Life of project (years) 10 15
Payback period (years) 7 11
IRR (%) 14.1 15.5Required
a. Are both projects acceptable to the entity?
b. If the entity had a history of conservatism in its financial decision making, which project
would you advise?
c. Which project would you advise, after taking only these decision-support tools into consider-
ation? Why?12.26 Making an investment decision on a project LO2, 3, 4, 5
An inner city amateur theatre company, Theatre Mama, is planning on performing a new take
on two Shakespearean plays, Hamlet and Macbeth at an old Sydney theatre in the inner suburb
of Newtown. The producers of the theatre plan on alternating the performances of the two plays
for a combined total of 40 weeks, if possible. Given the size of the theatre and the expected
seat-sales rate, the producers think they can gross $420 000 at the box office. The plays will
cost $53 000 to mount in the first place to cover costs of new sets, costumes and props, and the
weekly running costs are expected to be $5300.
Assume for the NPV and IRR calculations that all funds are earned and paid, except the
mounting costs, at the end of the 40 weeks. The sets, costumes and props are expected to realise
$26 5000 at the end of the run.
Required
a. What is the ARR?
b. What is the PP?
c. What is the NPV if the producers can earn 13 per cent elsewhere on their funds?