As a Neptune Holdings Plc junior management accountant, the Finance Director wants your calculations and recommendation regarding an expansion plan the Board is considering, which includes a chain of factory outlet stores.

Below are the figures for the first one that is planned for a central Manchester location next year.

Company policy dictates that any decision should be based on the results of calculating Net Present Value (NPV) of 3 years of cash flows using a cost of capital of 12%, Payback Period (PBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a 5% cushion in case of increases in inflation or interest rates.

The initial investment investment consists of 100,000 for the land, building costs of 158,000, and 36,600 for fittings and equipment.

The cash flows in year 1 are expected to be: total sales revenue 600,600; the cost of Alpha products sold 165,900; Beta stock sold 118,860; staff costs 24,780; light & heat 35,196; other overheads 134,904. The cash flows for years 2 and 3 are the same as those in the first year, however expected increase by 2% inflation each year.

Requirements for Question 2 part (b)

Using the information above and in accord with the above stated company policy you are required to calculate:

Net Present Value (NPV)

Payback period (PBP) and Discounted Payback Period (DPBP)

Internal Rate of Return

Based on your calculations do you recommend the investment is made and the new outlet store is built?

Critically discuss the limitations of the above project appraisal techniques used and any other recommendations on issues the board that must be considered before making final investment decision