Investment Appraisal:

A Micro-brewery has proposed that will require investment of 600,000 to open. Assuming annual sales of 1 million, variable costs of 50%, fixed costs of 300,000 and a tax rate of 25%. The government has allowed a 100% Capital Allowance to be spread equally over 4 years of the investment cost.

Required:

a.Establish the NPV of the project over a 10-year horizon (no inflation or salvage value assumed) with a 12% cost of capital.

b. Determine the IRR of the project and comment on the importance of establishing the correct discount rate.

c.Comment on the major advantages and weaknesses of the NPV and IRR.

d. Provide the MIRR % and why it may be considered as more reliable than the IRR.

e. If ARR% (Accounting rate of return using Average profits/Initial Investment * 100) was used as an assessment on the impact on the annual accounts, comment upon and show the difference between the methods used in a. to d. above.