Question
Perri-perri Sauce (PPS)Ltd, is well established London based fast-food company. The directors are expecting that demand of meal in future will increase significantly and with
Perri-perri Sauce (PPS)Ltd, is well established London based fast-food company. The directors are expecting that demand of meal in future will increase significantly and with current capacity company will not be able to meet the demand. Therefore, directors have decided to purchase a new machine to enhance the capacity to benefit from the expected increase in demand. Two versions of machines are available from different manufacturers at the same cost of 600,000. Both machines have six years useful life and will be sold at estimated price of 60,000 at the end of sixth year. PPS Ltd will use straight line method for depreciation of these machines. Cost of capital for both machines is 8%. Directors are to purchase one machine from the available two, same cost and net cash inflow from both machines is confusing them to take decision. You are Finance Manager of PPS Ltd and directors have asked to produce a report which should highlight the economic feasibility for decision making. Further information regarding net cash inflow from both machines is provided below: Machine A Machine B Years Cash flow Cash flow 0 (600,000) (600,000) 1 300,000 80,000 2 250,000 85,000 3 200,000 150,000 4 150,000 200,000 5 85,000 250,000 6 80,000 300,000 Requirements: Required: 1. Calculate (2-decimal places) using the following investment appraisal techniques, and provide recommendations as to the economic feasibility of acquiring the suitable machine: a. The Payback Period. b. The Discounted Payback Period. c. The Accounting Rate of Return. d. The Net Present Value. e. The Internal Rate of Return (to two decimal places) Marks (15%) 2. Critically evaluate the key benefits and limitations of each of the differing investment appraisal techniques, supporting the response with relevant academic research as to whether each of the differing techniques is applied in practice within a real-life business context. Marks (20%) 3. You are also required to critically evaluate three suitable sources of finance to fund PPS Ltd in this investment as compared to a listed company.
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