Prospect Limited is considering investing in some new plant. The plant would cost ?1,000,000 to implement, it would last 5 years, and it would then be sold for ?50,000. The relevant profit and loss accounts for each year during the life of the project are as follows:

Additional information:

1. All sales are made and all purchases are obtained on credit terms.

2. Outstanding trade debtors and trade creditors at the end of each year are expected to be as follows:

3. Expenses would all be paid in cash during each year in question.

4. Taxation would be paid on 1 January following each year end.

5. Half the plant would be paid for in cash on 1 April 20X0, and the remaining half (also in cash) on January 20X1. The resale value of ?50,000 will be received in cash on 31 March 20X6.

Requirements:

1) Calculate the annual net cash flow arising from the purchase of this new plant.

a) If the cost of capital is 8%, evaluate the proposed investment using the following techniques: Return on Investment,

2) b) Payback,

c) Return on Investment,

d) Net Present Value,

e) Discounted Net Present Value,

f) Internal Rate of Return.

Year to 31 March Sales Less: Cost of goods sold Opening stock Purchases Less: Closing stock Gross profit Less: Expenses Depreciation Net profit Taxation Retained profits 20X1 000 2000 1600 1600 200 1400 600 210 190 400 200 40 160 20X2 000 2400 200 1790 1990 300 1690 710 220 190 410 300 70 230 20X3 000 2800 300 2120 2420 450 1970 830 240 190 430 400 100 300 20X4 000 2900 450 1960 2410 350 2060 840 250 190 440 400 100 300 20X5 000 2000 350 1110 1460 50 1410 590 300 190 490 100 10 90 Year 20X1 20X2 20X3 20X4 20X5 Trade debtors 000 200 240 300 320 400 Trade creditors 000 250 270 330 300 150