Topic 3.8: Investment Appraisal Questions

A business buys a machine for $90,000. Over its five years of use, the machine is forecast to bring in total returns of $130,000. Calculate the average rate of return (ARR) for the machine (show all your working).

Harbour Yoga Studio expects a new studio room to bring in net cash flows of $30 000 at the end of year 1 and $30 000 at the end of year 2. The discount factors at 10% are 0.9091 (year 1) and 0.8264 (year 2). Calculate the total present value of these net cash flows (show all your working).

Roxy Cinema plans a $360 000 refit with reclining seats. It expects the refit to add a net cash flow of $80 000 a year. Calculate the payback period for the refit (no working required).

A business invests $90,000 in new equipment, which is forecast to bring in total returns of $120,000 over four years of use. Calculate the average rate of return (ARR) for the equipment (show all your working).

What is a genuine advantage of using the average rate of return to appraise an investment?

Ridgeway Energy plans to put up a wind turbine for $1.1m and sell the electricity it makes. Table 3 shows the forecast net cash flow (figures in $m). **Table 3: Forecast net cash flow for Ridgeway Energy’s wind turbine** | Year | Net cash flow ($m) | |---|---| | 1 | 0.2 | | 2 | 0.22 | | 3 | 0.24 | | 4 | 0.26 | | 5 | 0.28 | | 6 | 0.3 | Using Table 3, calculate the payback period for the wind turbine (no working required).

Hollis Print is considering buying a new digital printer for $60 000. It expects the printer to bring in a net cash flow of $18 000 a year for four years. Calculate the payback period for the printer (show all your working).

Northgate Student Homes plans to build a student hall for $1 900 000. Table 3 shows the forecast net cash flow from rents (figures in $000). **Table 3: Forecast net cash flow for Northgate Student Homes’ student hall** | Year | Net cash flow ($000) | |---|---| | 1 | 300 | | 2 | 320 | | 3 | 340 | | 4 | 360 | | 5 | 380 | | 6 | 400 | Using Table 3, calculate the payback period for the student hall (no working required).

Fernhill Garage plans to buy a tyre-fitting machine for $80 000. It expects the machine to bring in a net cash flow of $20 000 a year. Calculate the payback period for the machine (no working required).

Riverside Cinemas is deciding whether to add two screens. Its finance manager discounts the forecast net cash flows at 6% before comparing them with the cost. Explain one reason why future net cash flows are discounted in a net present value (NPV) calculation.

Oakfield Garden Centre is considering a café that would cost $50 000 and bring in net cash flows of $30 000 in each of the next two years. The discount factors at 10% are 0.9091 (year 1) and 0.8264 (year 2). Calculate the net present value (NPV) of the café (show all your working).

A project costs $100 000 now and returns $40 000, $50 000 and $60 000 at the end of years 1 to 3. At a discount rate of 10% (factors 0.9091, 0.8264 and 0.7513) its NPV is $22 762. It is re-appraised at a discount rate of 5%, with factors of 0.9524, 0.9070 and 0.8638. Calculate the new net present value and explain what the change shows.

Corvin Ltd expects to receive $40,000 in one year and another $40,000 in two years. Using discount factors of 0.909 and 0.826, what are those receipts worth today?

A small retailer is deciding whether to expand. Suggest two financial factors it should consider.

Two machines have almost identical forecast returns. Which factor should most influence the choice?

Castleford Cycles plans to buy a paint booth for $50 000. Table 1 shows the forecast net cash flow from the booth. **Table 1: Forecast net cash flow for Castleford Cycles’ paint booth** | Year | Net cash flow ($) | |---|---| | 1 | 12 000 | | 2 | 16 000 | | 3 | 20 000 | | 4 | 10 000 | Using Table 1, calculate the payback period for the paint booth (show all your working).

Project A pays back in 2.5 years with an average rate of return of 9%. Project B pays back in 4 years with 17%. Which suits a cash-strapped start-up?

A business is choosing between two machines. The cheaper machine has slightly lower ARR, but the supplier offers excellent after-sales service and training. Explain two qualitative factors that could influence the final decision.

Hopworth Brewery plans to modernise its brewhouse. Table 2 shows the cost in year 0 and the forecast net cash flow in each year after it (figures in $m). **Table 2: Forecast net cash flow for Hopworth Brewery’s modernised brewhouse** | Year | Net cash flow ($m) | |---|---| | 0 | (2) | | 1 | 0.5 | | 2 | 0.6 | | 3 | 0.7 | | 4 | 0.6 | Using Table 2, calculate the payback period for the modernised brewhouse (show all your working).

Silva Tiles is deciding whether to open a second branch. Which pair of factors is most clearly financial?