The Lobels Int Company plc is a successful biscuit manufacturer. Since it was established

five years ago it has gradually increased its range of plain and cheese biscuits. The sales

director has now come to the board with a proposal to expand the range further into

chocolate coated biscuits. This will involve the purchase of new machinery; the initial

outlay will be $$135000.$ The finance director and the sales director meet to discuss sales

Page $5$ of $7$

projections for the new range of chocolate biscuits. They forecast the following net cash

inflows over the five year period until the machinery will need to be replaced:

Year $

$135000$

$247000$

$352000$

$455000$

$555000$

In addition to these inflows, it is expected that the machinery will be sold for scrap at

the end of year five for $$10000.$ The company$$s policy is to depreciate machinery on

the straight line basis over its estimated useful economic life.

Required:

i$.$ Calculate ARR for the investment project

ii$.$ Calculate the payback period for the project

b$)$ A trusted friend of yours present you with an investment opportunity. If you

invest $$26,500$ now into this investment, then your friend can guarantee the following cash

inflows to occur:

Year $2469$

Cash flow $$16,500$ $$11,500$ $$3,500$ $$8,750$

If the effective discount rate is $10\mathrm{.}25\%$ per year determine the net present value.

c$)$ Takunda is struggling to pay her monthly debts. She approached her bank

recently and they recommended that she takes out a revolving credit loan of $$45,000$ to

consolidate all of her debts. The terms and conditions of this loan states that the loan must

be paid back monthly over $5$ years at a nominal rate of $6\mathrm{.}5\%$ per year, compounded

monthly. Determine:

$$ The principal contained in the $25$th payment.

$$ The balance outstanding after the $50$th payment.

$$ The final payment $($with the adjustment$)$Question $5$

a$)$ The Lobels Int Company ple is a successful biscuit manufacturer. Since it was established

five ycars ago it has gradually increased its range of plain and chcese biscuits. The sales

director has now come to the board with a proposal to expand the range further into

chocolate coated biscuits. This will involve the purchase of new machinery; the initial

outlay will be $$135000.$ The finance director and the sales director meet to discuss sales

projections for the new range of chocolate biscuits. They forecast the following net cash

inflows over the five year period until the machinery will need to be replaced:

In addition to these inflows, it is expected that the machinery will be sold for scrap at

the end of ycar five for $$10000.$ The company's policy is to depreciate machinery on

the straight line basis over its estimated useful cconomic life.

Required:

i$.$ Calculate ARR for the investment project

ii$.$ Calculate the payback period for the project

b$)$ A trustod friend of yours present you with an investment opportunity. If you

invest $$26,500$ now into this investment, then your friend can guarantee the following cash

inflows to occur:

If the effective discount rate is $10\mathrm{.}25\%$ per year determine the net present value.

c$)$ Takunda is struggling to pay her monthly debts. She approached her bank

recently and they recommended that she takes out a revolving credit loan of $$45,000$ to

consolidate all of her debts. The terms and conditions of this loan states that the loan must

be paid back monthly over $5$ ycars at a nominal rate of $6\mathrm{.}5\%$ per year, compounded

monthly. Determine:

The principal contained in the $25$ th payment.

The balance outstanding after the $50$th payment.

The final payment $($with the adjustment$).$