Question 2

Delta Plc is considering investing in bespoke software solutions, which requires an initial investment of 150,000. The annual cash inflows during years 1-3 are expected to be 50,000 for year 1; 55,000 for year 2 and 62,000 for year 3. The companys money cost of capital is 7% and inflation is expected to be 4% during the life of the project.

a) Calculate the ARR of the project, taking inflation into account. (3 marks)

b) Calculate the (undiscounted) Payback Period of the project, taking inflation into account. (3 marks)

c) Calculate the NPV of the project using the money cost of capital as the discount rate. (5 marks)

d) Calculate the NPV of the project using the real rate of return as the discount rate (round up to 2 decimal places).

e) Discuss the impact that the decision made on the project acceptance based on the money cost of capital and real rate of return would have on Delta Plc. (4 marks)