Company is appraising four different projects but is experiencing capital rationing in Year 0. No capital rationing is expected in future periods but none of the four projects that company is considering can be postponed, so a decision must be made now. Company cost of capital is 12%.

 The following information is available.

Project  Outlay in

                 Year 0              PV           NPV

                     $                    $               $

Amster 100,000          111,400 11,400

Eind     56,000             62,580    6,580

Utrec  60,000            68,760     8,760

Tilbur 90,000          102,400    12,400

 Arrange the projects in order of their preference to company using the profitability index, with the most attractive first.

 Which of the following statements about company decision to use PI is true.

 The PI takes account of the absolute size of the individual projects.

  PI highlights the projects which are slowest in generating returns.

 PI can only be used if projects are divisible.

 PI allows for uncertainty about the outcome of each project.

 

 Several years later, there is no capital rationing and company decides to replace an existing machine. company has the choice of either a Super machine (lasting four years) or a Great machine (lasting three years).

                                           0            1           2               3             4

Maintenance costs                 (20,000) (29,000) (32,000) (35,000)

Investment                              (250,000)                                 25,000

Net cash flow         (250,000) (20,000) (29,000) (32,000) (10,000)

Discount at 12%        1.000  0.893        0.797      0.712     0.636

Present values        (250,000) (17,860) (23,113) (22,784) (6,360)

 Tax and tax-allowable depreciation should be ignored. What is the equivalent annual cost (EAC) of the Super machine.

The following potential cash flows are predicted for maintenance costs for the Great machine:

 Year Cash flow Probability

            $

2 19,000              0.55

2 26,000             0.45

3 21,000              0.3

3 25,000            0.25

3 31,000            0.45

 What is the expected present value of the maintenance costs for Year 2.

Company plans to buy a machine costing $250,000 which will last for 4 years and then be sold for $5,000.

 Net cash flows before tax are expected to be as follows.

                                 T1          T2          T3         T4

Net cash flow $ 122,000 143,000 187,000 78,000

 Depreciation is charged on a straight-line basis over the life of an asset.

 Calculate the before-tax return on capital employed (accounting rate of return) based on the average investment.

 Company can claim tax-allowable depreciation on a 25% reducing balance basis. It pays tax at an annual rate of 30% one year in arrears. What amount of tax relief would be received by company in time 4 of a net present value (NPV) calculation.

 What is the payback period for the machine (to the nearest whole month).