Knuckle Down - Investment Appraisal - ACCA - F9 - Financial Management

Question: Knuckle Down

The management of Knuckle Down are reviewing the company's capital investment options for the coming year, and are considering six projects.

Project A

Project A would cost $29,000 now and would earn the following cash profits.

• 1st Year: $8,000
• 2nd Year: $12,000
• 3rd Year: $10,000
• 4th Year: $6,000

The capital equipment purchased at the start of the year could be resold for $5,000 at the start of the 5th Year.

Project B

Project B would involve a current outlay of $44,000 on capital equipment and $20,000 on working capital. The profits from the project would be as follows.

Fixed cost include an annual charge of $4,000 for depreciation. At the end of the third year, the working capital investment would be recovered and the equipment would be sold for $5,000.

Project C

Project C would involve a current outlay of $50,000 on equipment and $15,000 on working capital.  The investment in working capital would be increased to $21,000 at the end of the first year. Annual cash profits would be $18,000 for 5 years, at the end of which the investment in working capital would be recovered.

Project D

Project D would involve an outlay of $20,000 now and a further outlay of $20,000 after one year. Cash profits thereafter would be as follows.

• 2nd Year: $15,000
• 3rd Year: $12,000
• 4th to 8th Years: $8,000 per annum

Project E

Project E is a long-term project, involving an immediate outlay of $32,000 and annual cash profits as follows.

• 1st to 5th Years: $5,000
• 6th to 10th Years: $4,000
• 11th Year onwards: $3,000

The company discounts all projects of 10 years duration or less at a cost of 12%, and all other projects a cost of 15%.

Ignore Taxation.

Required:

• (a) Calculate the NPV of each project and determine which should be undertaken by the company on financial grounds.
• (b) Calculate IRR of Projects A, C and E.