SwiftRide Ltd is considering investing £300,000 into a new machine that will enable them to produce electric scooters over the next 5 years. The company managers have asked for your help to put together a capital expenditure proposal for the new machine and are conscious that they will only get the 'go ahead' to invest if the project has a payback period of less than 5 years, a positive NPV at the most appropriate discount rate and an ARR and IRR of greater than the weighted average cost of capital.

 

The £300,000 has been borrowed. Two thirds of the £300,000 has come from a bank loan with a return required of 9% and one third of the £300,000 come from equity with a return required of 15%.

 

The company uses straight line depreciation. The machine will have no scrap value after 5 years. 

Year    Operating profit £

0          (300,000)

1          55,000

2          75,000

3          92,000

4          125,000

5          85,000

 

What would be the results of the payback period investment appraisal method and an evaluation of the strengths and weaknesses of this technique?