Question B1:

Steady Sports Limited has been formed several years ago and have a website initially developed the same time the business was formed. The website shows a range of the companys products and allows customers to order online. The order is then processed by one of the companys stores.

Since then, the company experienced a significant increase on internet orders, the number of queries and emails caused by a start of a global pandemic. Jane is the director of Steady Sports Limited has been exploring the best way to further grow this area of the business and engaged a company of management consultants, Consult Us Ltd., to carry out a feasibility study.

You are working as a consultant at Consult Us Ltd. and your company advised that Steady Sports Limited to establish a professionally developed website and improve its delivery services by purchasing new delivery vehicles or an automated warehouse to deal with online orders. You are assigned for providing a report to Steady Sports management. This proposal will involve the business in a large capital outlay, and you were asked by your senior manager to prepare all the calculations and results using various investment appraisal techniques for both projects.

Required:

a) Calculate the payback period for each of the projects. (Provide all your workings).

b) Calculate ARR of each of the options using the average capital employed provided for each option below: (Provide all your workings).

Delivery vehicles = 70,000

Automated warehouse = 215,000

Depreciation would be charged on the straight-line basis.

c) Calculate the NPV for each of the projects. (Provide all your workings).

d) Interpret your findings for parts a to c. If Steady Sports Limited would like to proceed with only one of the projects, advise them which of the projects they should choose, based on your appraisals. Discuss any other factors that should need to be considered on their decision making.

e) Explain factors that are likely to have influenced Steady Sports Limiteds choice of discount rate.

Provided: Delivery Automated vehicles Warehouse 25,000 Already paid Year 0 Initial cost 0 (96,000) (247,000) Year 1 30,000 60,000 2 40,000 65,000 Estimated cash flows: Estimated cash flows: 3 44,000 72,000 Estimated cash flows: 4 46,000 78,000 Estimated cash flows: 5 50,000 80,000 Scrap value of the assets 5 40,000 180,000