George Manly Plc is an oil and gas company. The company sold the commodity under contract and the excess production sold on the spot market. The contract is based on 550,000 tons of oil per year at $55 per ton. The company feels that the production will be 620,000 tons, 680,000 tons, 730,000 tons and 590,000 tons over the next four years. The excess production will be sold at an average of $50 per ton. The variable costs amount to $11 per ton and fixed costs are $2,300,000 per year. The net working capital investment of 10 per cent of sales is required. This will be built up in the year prior to the sales.

The company purchased a piece of land worth $6 million ten years ago. If it sold the land today, the company could receive $7 million on an after-tax basis. The company needs to purchase additional equipment for its operation. The equipment will cost $85 million and depreciate at annual rate of 20% on carrying amount at the beginning of the year. The equipment can be sold at $40 million after four years.

The company will be responsible for reclaiming the land in year 5. The cost of reclamation will be $2.8 million. The corporate tax rate is at 40% per annum. The company has a 12 per cent required return on this project. The loss in any year will result in a tax credit.

You are the Senior Management Accountant of George Manly. You are required to write a comprehensive report to the Board of the company, which discusses how the following investment appraisal techniques are used in making capital investment decisions, looking at the merits and demerits of each technique and their limitations.

Your report should include your calculations of these techniques, which should be in the Appendices not in the body of your report. Use the spreadsheet tool to calculate your answers. The working method should be included in the Appendices. Show your necessary workings by using the nearest $ and express in two decimal places for those calculated rates of returns.

• Net cash flows from year 0 to year 5.
• Payback Period of the proposed investment.
• The Accounting Rate of Return of the proposed investment.
• The Net Present Value of the proposed investment.
• The Internal Rate of Return of the proposed investment.
• Comments on the viability of the proposed investment.