Serendipity is an Internet service provider that has a major investment in computer and telecoms equip¬ ment, 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 15.8.

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.

Transcribed Image Text:

Table 15.8 Serendipity plc capital investment evaluation. In '000 Year 0 1 2 3 4 5 6 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