Question 3

Al Burami plc has a subsidiary that is requesting for additional cash injection to purchase a machinery. The forecasted cash flows of the machinery over the next 5 years are as follow:-

Year	Cashflow OMR	DCF @ 10%	DCF @ 20%
0	(20,200)	1.000	1.000
1	6,700	0.909	0.833
2	6,700	0.826	0.694
3	6,700	0.751	0.579
4	6,700	0.683	0.482
5	6,700	0.621	0.402

Required:-

Write a management report to the Managing Director of AL Burami plc, on whether they should provide the subsidiary with additional cash to invest in the machinery. The cost of capital is 10%. Your report should include, inter alia:-

1. The use of the Payback, NPV and IRR techniques as part of your investment appraisal;
2. All your calculations are to be shown clearly;

3. A critical discussion of which investment appraisal technique is the most appropriate;

4. Any other information you may require.

Formula.

Approx. IRR = R1 + NPV1 (R2 R1)

(NPV1 NPV2)