CASE STUDIES 453
Table A3.7 Serendipity PLC capital investment evaluation
in£’000 Year0123456
Capital investment 5,000
Depreciation 20% p.a. 1,000 1,000 1,000 1,000 1,000
Asset value end of year 4,000 3,000 2,000 1,000 0
Profit
Additional income 1,500 2,000 2,500 2,500 2,500
Additional expenses − 150 − 350 − 500 − 500 − 500
Depreciation −1,000 −1,000 −1,000 −1,000 −1,000
Profit 350 650 1,000 1,000 1,000
Tax @ 35% − 105 − 195 − 300 − 300 − 300
Profit after tax 245 455 700 700 700
ROI 6.1% 15.2% 35.0% 70.0% n/a
Cash flow
Capital investment −5,000
Cash receipts 1,500 2,000 2,500 2,500 2,500
Additional expenses − 150 − 350 − 500 − 500 − 500
Tax @ 35% − 105 − 195 − 300 − 300 − 300
Net cash flow −5,000 1,350 1,545 1,805 1,700 1,700 − 300
Discount rate 8%
Net present value £1,225
each report might inform management decision-making. What criteria should the
business use in any decision to discontinue its least profitable product?
This question particularly relates to an understanding of Chapter 11.
Case study 6: Serendipity PLC
Serendipity is an Internet service provider that has a major investment in com-
puter and telecoms equipment, which needs replacement on a regular basis. The
company has recently evaluated a £5 million equipment-replacement programme,
which has an expected life of five years. The proposal is supported by the data in
Table A3.7.
As the ROI and NPV look healthy, the investment proposal will be submitted
to the board for approval. Prior to the above figures being submitted, you have
been asked for your comments.
This question particularly relates to an understanding of Chapters 12 and 13.
Case study 7: Carsons Stores Ltd
Carsons is a retail store that has given the task of preparing its budget for next
year to a trainee accountant. The budget is prepared in quarters. Table A3.8 is the
profit budget report produced by the trainee.