Question

Question.3 As the accountant for Gamble Limited you have the responsibility for eveluating capi proposals. For th of both proposals are as follows al. Details e coming year the following two proposals have been presented for your approv Proposal X This project will require an initial investment of є500 000 n plant and machinery. Cash infows for the four years will be 160,000 per annum. At the end of year four the plant will be decommissioned and it is expected to yield €60,000 from its sale. for the four Proposal Y This project will require an initial investment of 400,000 in plant and machinery. The cashflows project have not yet been computed but you have been presented with the following data. Sales Units 8,000 12,000 15,000 10,000 Year Ycar 2 Year 3 Year 4 s 622, direct labour 12 and The selling price per unit is 55. Costs per unit are as follows - direct material variable costs E8. The selling price and all costs will remain constant over the four years and all costs are paid for in cash as they occur Gamble Ltd expects the cost of capital to be 10%. Discount Factors - Present Value of 1 10% 15% 0.870 0.756 0.658 20% 5% Year 0.909 0.826 0.751 0.833 0.952 0.694 0.907 0.579 0.864 0.572 0.683 0.482 0.822 4 0.497 0.402 0.335 0.784 0.621 0.564 0.432 0.746 Required:- Evaluate each of the two projects using:- (a) i) Payback. (6 marks) (i) Net Present Valuce. (8 marks) (iii) Intemal Rate of Return. (8 marks) (b) Lf only one project eould be pursued, which would you recommend, giving reasons for your answer? (3 marks) (Total 25 marks)

Please, I need the answer and the approaches step by step( all the information about how to get the data) in an easy way for my understanding Thanks!

Answer 1

Project X
Investment 500000, Salvage Value = 60000, Life = 4 years
Cash Inflow = 160000

(a) Payback Period = Investment / Annual Cash inflow
= 500000 / 160000 = 3.125 years

(b)

Year	Cash Inflow	PV Factor @20%	PV
1	€   160,000.00	0.909	€          145,440
2	€   160,000.00	0.826	€          132,160
3	€   160,000.00	0.751	€          120,160
4	€   220,000.00	0.683	€          150,260
	Total PV		€          548,020
	Investment		€          500,000
	NPV		€            48,020

(c) At IRR, NPV = 0,
Lets try another rate of 15%

Year	Cash Inflow	PV Factor @20%	PV
1	€   160,000.00	0.870	€          139,200
2	€   160,000.00	0.756	€          120,960
3	€   160,000.00	0.658	€          105,280
4	€   220,000.00	0.572	€          125,840
	Total PV		€          491,280
	Investment		€          500,000
	NPV		€            (8,720)

IRR = 10% + 48020 x 5% = 10% + 4.23% = 14.23%
  48020 + 8720

Project Y
(a)

Year	Sales units	Contribution per unit	Cash Inflow	Cummulative Cash Inflow
1	8000	€             13.00	€    104,000.00	€      104,000.00
2	12000	€             13.00	€    156,000.00	€      260,000.00
3	15000	€             13.00	€    195,000.00	€      455,000.00
4	10000	€             13.00	€    130,000.00	€      585,000.00

Investment is 400000 for which 260000 is recovered in 2 years and 455000 in 3 years but we need 400000, therefore (400000-260000) i.e. 140000  will be recovered in third year
Payback Period = 2 + 140000 / 195000 = 2.72 years

(b)

Year	Sales units	Contribution per unit	Cash Inflow	PV Factor @10%	PV
1	8000	€             13.00	€    104,000.00	0.909	€         94,536
2	12000	€             13.00	€    156,000.00	0.826	€      128,856
3	15000	€             13.00	€    195,000.00	0.751	€      146,445
4	10000	€             13.00	€    130,000.00	0.683	€         88,790
			Total PV		€      458,627
			Investment		€      400,000
			NPV		€         58,627

(c) At IRR, NPV = 0,

Lets try another rate of 20%

Year	Sales units	Contribution per unit	Cash Inflow	PV Factor @20%	PV
1	8000	€             13.00	€    104,000.00	0.833	€         86,632
2	12000	€             13.00	€    156,000.00	0.694	€      108,264
3	15000	€             13.00	€    195,000.00	0.579	€      112,905
4	10000	€             13.00	€    130,000.00	0.482	€         62,660
			Total PV		€      370,461
			Investment		€      400,000
			NPV		€      (29,539)

IRR = 10% + 58627 x 10% = 10% + 6.65% = 16.65%
  58627 + 29539

Project Y should be pursued as it has higher NPV and higher IRR.