Section 6. Investment Decision Making and Financing of Businesses

Question 6 Investment decision making and Financing of Businesses {10 marks} Part {a} [6 marks} Chicken Spot sells takeaway chicken and related products. The manager is considering acquiring an advanced new oven which will substantially reduce the time required to cook chicken and would also enable the store to diversify into the sale of pizza. The cost of the new oven is $40,000 and it is estimated the oven will be sold for $5,000 at the end of its useful life. Chicken Spot has estimated the oven will have a useful life of three years, and will influence annual cash ows as follows: Year Annual Cash flows Present Value [WI 1 $19,200 $17,142.86 $19,200 $15,306.12 $24,200 $17,225 .08 {$19,200 cash flow 1- $5,000 sale of oven) TOTAL $49,674.06 Chicken Spot management prefer projects with a payback period of less than 3 years. Regulred ll) Calculate the Net Present Value [NW] of the project. [2 marks] {ii} Calculate the Payback Period (PP) ofthe project. [2 marks] {iii} Based on your calculations of NPV and PP, should the management of Chicken Spot proceed with the purchase of the oven? Why? {2 marks} *Students please remember to show all workings to maximise your mark