Answer Happy

BridgefordBridgeford is considering whether or not to invest in the development of a new product, which would havean expected market life of five years.The managing director is in favour of the project, because its estimated accounting rate of return (ARR)would be over 15%.His estimates for the project are as follows:Year 0 1 2 3 4 5 $'000 $'000 $'000 $'000 $'000 $'000Cost of equipment 2,000 Total investment in working capital 200 250 300 350 350 Sales 2,500 3,000 3,500 3,500 3,000Materials costs 500 600 700 700 600Labour costs 750 900 1,100 1,100 1,000Overhead costs 300 350 350 350 350Interest 240 240 240 240 240Depreciation 400 400 400 400 400Total costs 2,190 2,490 2,790 2,790 2,590Profit 310 510 410The average annual profit before tax is $530,000 and with corporation tax at 35%, the average annual profit after tax is $344,500. This gives an ARR of 15.7% on the initial investment of $2,200,000. As finance director, you have some criticisms of the managing director's estimates. His figures ignore both inflation and capital allowances on the equipment, and you decide to prepare an amended assessment of the project with the following data.(1) Selling prices and overhead expenses will increase with inflation by 5% p.a.(2) Materials costs, labour costs and the working capital requirements, will increase by 10% p.a.(3) For taxation purposes, capital allowances will be available against the taxable profits of the project,at 25% p.a. on a reducing balance basis.(4) The rate of corporation tax on taxable profits is 35% and tax is paid one year in arrears.(5) The equipment will have a zero salvage value at the end of the project's life.(6) The company's real after-tax weighted average cost of capital is estimated to be 7% p.a. and its nominal after-tax weighted average cost of capital is 12%.Required(a) Estimate the net present value of the project, and recommend, on the basis of the NPV, whether ornot the project should be undertaken.(b) Outline the strengths and weaknesses of the internal rate of return method as a basis forinvestment appraisal.
Bridgeford
Bridgeford is considering whether or not to invest in the development of a new product, which would have
an expected market life of five years.
The managing director is in favour of the project, because its estimated accounting rate of return (ARR)
would be over 15%.
His estimates for the project are as follows:
Year 0 1 2 3 4 5
$'000 $'000 $'000 $'000 $'000 $'000
Cost of equipment 2,000
Total investment in working capital 200 250 300 350 350
Sales 2,500 3,000 3,500 3,500 3,000
Materials costs 500 600 700 700 600
Labour costs 750 900 1,100 1,100 1,000
Overhead costs 300 350 350 350 350
Interest 240 240 240 240 240
Depreciation 400 400 400 400 400
Total costs 2,190 2,490 2,790 2,790 2,590
Profit 310 510 410
The average annual profit before tax is $530,000 and with corporation tax at 35%, the average annual profit after tax is $344,500. This gives an ARR of 15.7% on the initial investment of $2,200,000.
As finance director, you have some criticisms of the managing director's estimates. His figures ignore both inflation and capital allowances on the equipment, and you decide to prepare an amended assessment of the project with the following data.
(1) Selling prices and overhead expenses will increase with inflation by 5% p.a.
(2) Materials costs, labour costs and the working capital requirements, will increase by 10% p.a.
(3) For taxation purposes, capital allowances will be available against the taxable profits of the project,
at 25% p.a. on a reducing balance basis.
(4) The rate of corporation tax on taxable profits is 35% and tax is paid one year in arrears.
(5) The equipment will have a zero salvage value at the end of the project's life.
(6) The company's real after-tax weighted average cost of capital is estimated to be 7% p.a. and its nominal after-tax weighted average cost of capital is 12%.
Required
(a) Estimate the net present value of the project, and recommend, on the basis of the NPV, whether or
not the project should be undertaken.
(b) Outline the strengths and weaknesses of the internal rate of return method as a basis for
investment appraisal.
QUESTION 1 BUSINESS FINANCE 2 ASSIGNMENT Bridgeford Bridgeford is considering whether or not to invest in the development of a new product, which would have an expected market life of five years. The managing director is in favour of the project, because its estimated accounting rate of retum (ARR) would be over 15% His estimates for the project are as follows: Year Cost of equipment Total investment in working capital Sales Materials costs Labour costs Overhead cons Interest Depreciation Total cos Profit $1000 2,000 200 1 $000 $000 ¬.. 250 300 2.500 1.000 500 750 300 240 400 2.190 310 600 900 350 240 400 2.490 $1000 350 1.500 700 1,100 350 240 400 $000 350 3,500 700 1,100 350 240 400 2,290 $ $000 1.000 600 1,000 350 240 400 2.790 2.590 510 710 710 410 The average annual profit before tax is $530,000 and with corporation tax at 35%, the average annual prot after taxis 1344,500. This gives an ARR of 15.7% on the intal investment of $2,200,000. As finance director, you have some criticisms of the managing director's estimates. His figures ignore both inflation and capital allowances on the equipment, and you decide to prepare an amended assessment of the project with the following data (1) Selling prices and overhead expenses will increase with ination by 5% pa (2) Materials costs, labour costs and the working capital requirements, will increase by 10% pa (3) For taxation purposes, capital allowances will be available against the taxable profits of the project at 25% pa on a reducing balance basis (4) The rate of corporation tax on taxable profits is 35% and tax paid one year ins (5) The equipment will have a zero salvage value at the end of the projects life (6) The company's real after-tax weighted average cost of capital is estimated to be 7% and its nominal after-tax weighted average cost of capital 12% (Outline the strengths and weaknesses of the internal rate of return method as a basis for investment appraisal Required (a) Estimate the net present value of the project, and recommend, on the basis of the NPV, whether or not the project should be undertaken
QUESTION 1 Total Bridgeford Bridgford is considering whether or not to invest in the development of a new product, which would have an expected market life of five years. The managing director is in favour of the project, because its estimated accounting rate of return (ARR) would be over 15%. His estimates for the project are as follows: Year Cost of equipment Total investment in working capital Sales Materials costs Labour costs Overhead costs Interest Depreciation Total costs Profe $000 2,000 200 - ******* (4) (5) (6) 3 5 $000 5000 $000 $'000 $000 500 750 - ******* 250 350 2.500 3,000 3.500 3,500 3,000 700 600 700 1,100 1,100 350 240 300 - ****** 350 240 400 2,190 2.490 240 400 1,000 350 240 400 400 2,790 2,790 2.590 410 710 710 The average annual profit before tax is $530,000 and with corporation tax at 35%, the average annual profit after taxis $344,500. This gives an ARR of 15.7% on the initial investment of $2,200,000 As finance director, you have some criticisms of the managing director's estimates. His figures ignore both ination and capital allowances on the equipment, and you decide to prepare an amended assessment of the project with the following data (1) Selling prices and overhead expenses will increase with inflation by 5% pa. (2) Materials costs, bour costs and the working capital requirements, will increase by 10% p.a. (3) for taxation purposes, capital allowances will be available against the taxable profits of the project at 25% pa ona reducing balance basis. The rate of corporation tax on taxable profits is 35% and tax is paid one year in mars The equipment will have a zero salvage value at the end of the project's Me The company's real after-tax weighted average cost of capital is estimated to be 7% pa, and its nominal after-tax weighted average cost of capital is 12% Required (A) Estimate the net present value of the project, and recommend, on the basis of the NPV, whether or not the project should be undertaken (8) Outline the strengths and weaknesses of the internal rate of return method as a basis for investment appraisal. 10 marks
Bridgeford Bridgeford is considering whether or not to invest in the development of a new product, which would have an expected market life of five years. The managing director is in favour of the project, because its estimated accounting rate of return (ARR) would be over 15%. His estimates for the project are as follows: Year Cost of equipment Total investment in working capital Sales Materials costs Labour costs Overhead costs Interest Depreciation Total costs Profit 0 $'000 2,000 200 1 $'000 250 2,500 500 750 300 240 400 2,190 310 2 $'000 300 3,000 600 900 1,100 350 240 400 2,790 510 710 350 240 3 $'000 $'000 400 2,490 350 3,500 700 350 3,500 700 1,100 350 240 400 2,790 710 5 $'000 3,000 600 1,000 350 240 400 2,590 410 The average annual profit before tax is $530,000 and with corporation tax at 35%, the average annual profit after tax is $344,500. This gives an ARR of 15.7% on the initial investment of $2,200,000.
As finance director, you have some criticisms of the managing director's estimates. His figures ignore both inflation and capital allowances on the equipment, and you decide to prepare an amended assessment of the project with the following data. (1) Selling prices and overhead expenses will increase with inflation by 5% p.a. (2) Materials costs, labour costs and the working capital requirements, will increase by 10% p.a. (3) For taxation purposes, capital allowances will be available against the taxable profits of the project, at 25% p.a. on a reducing balance basis. (4) (5) (6) The rate of corporation tax on taxable profits is 35% and tax is paid one year in arrears. The equipment will have a zero salvage value at the end of the project's life. The company's real after-tax weighted average cost of capital is estimated to be 7% p.a. and its nominal after-tax weighted average cost of capital is 12%. Required (a) (b) Estimate the net present value of the project, and recommend, on the basis of the NPV, whether or not the project should be undertaken. Outline the strengths and weaknesses of the internal rate of return method as a basis for investment appraisal. 10 marks