Calculation of the Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period for projects Endeavour and Fox
Calculation of the Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period
This project will require an immediate outlay of $1,500,000. This expenditure will not attract capital allowances. Net cash inflows are expected to be $750,000 in year 1, $620,000 in years 2 and 3 and $250,000 in years 4 and 5. Material costs are expected to be $9,600 in the first year, rising at an annual inflation rate of 5% per annum. Other expenses at current prices are $12,000 and these are expected to fall by 5% per annum over the life of the project.
This project will take the company in a new direction appealing to a different type of customer.
Additional financial information:
Corporation tax is paid at a rate of 20% and tax is payable one year in arrears.
Cost of capital is 10% and, unless otherwise stated, cash flows occur at the end of the year to which they relate.
A straight line method of depreciation at a rate of 20% is applied to all non current assets.
The initial investment of $1.5m, for whichever project is chosen, is significant in terms of value for EML Co. The board of directors are considering ways to finance the investment including either, increasing equity by issuing new ordinary shares, or taking on new debt in the form of a bank loan.
Required:
Prepare a report to the Directors of EML Co. which includes the following.
1. A calculation of the Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period for projects Endeavour and Fox. Detailed calculations should be included as an appendix to the report. All cash flows should be rounded to the nearest $. 30%
2. Analysis and evaluation of the investment project options as follows:
i. A recommendation regarding which project (if any) to undertake;
ii. Justifications for your recommendation including an evaluation of theinvestment appraisal techniques used in task 1 above.
iii. A summary of other factors that should be considered and information that may be needed prior to making a final decision. 30%
3. A discussion of the two sources of finance being considered by the board of EML Co. Your report should include:
i. A description of Equity and Debt.
ii. An explanation of the costs involved in each type of finance
[Type text]
iii. The comparative advantages and disadvantages of each of these as a source of finance from the perspectives of the board of EML Co., and potential investors. 30%
Marks are available for presentation of the report, which must not exceed 3,000 words. 10%
Total 100%
Marking guidance
Grading Criteria
Section Weighting Criteria
1) Calculation of NPV, IRR and Payback.
2) Analysis evaluation and recommendation. Additional factors and information.
3) Discussion of two sources of finance.
Demonstrate:
Relevant practical, academic and subject specific skills
Knowledge understanding and appreciation of issues involved.
Ability to research and provide practical and relevant points
Clear communication, explanation evaluation and discussion of aspects being covered.
Report
Structure and presentation
10%
Clarity of layout, grammar, presentation
and inclusion of all relevant matters
Tone and use of professional language
i.e. suitable for addressee of report
Accuracy of referencing, and
appropriate use of appendices
Assessment guidance
Your report should be word processed, clearly laid out and concise and should be
supported by appropriate workings for the numerical elements. The word limit for the
report is 3,000 words.
The text of this assignment must be in your own words (not even a sentence or phrase
should be taken from another source unless this source is referenced and the phrase
placed in quotes). It is dishonest not to acknowledge the work of other people and you
open yourself up to the accusation of plagiarism. Referencing should in accordance with
the Harvard System. A guide published by the Library lists the most common types of
references with examples. The guide can be found on the module VLE