Question
Pool plc is currently planning to buy a new machine which will cost 165,000. It is expected to generate new cash sales of 175,000 per
Pool plc is currently planning to buy a new machine which will cost 165,000. It is expected to generate new cash sales of 175,000 per year. The machine will be used for 5 years and at the end of this period it will be scrapped and not replaced. The scrap value of the machine is expected to be 20,000. Initial investment in working capital of 15,000 will also be needed.
Annual material and operating costs are estimated to be 105,000 per year.
Pool plc uses a discount rate of 10% in the investment appraisal process. The company has a target Return on Capital Employed (ROCE) of 30% per year, a minimum acceptable PI ratio of 1.6 and a maximum payback period of 2.5 years. Ignore taxation. (CLO 1, CLO 5, CLO 6)
Required:
(1) Payback period; (5 marks)
(2) Return on Capital Employed (accounting rate of return); (10 marks)
(3) Net Present Value (10 marks)
(4) IRR (use 10% and 20%) (10 marks)
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