Finance - Investment
Case study
This section is a case study looking at investment appraisal and the different methods that are available for assessing the merit of an investment project. You first need to read the information given below and then have a look at the associated questions.
Biz Training Ltd. is considering buying a new online learning system to enable them to deliver the training they do for their corporate clients. They are looking at three different systems and the cost of each system is as follows:
| System A | System B | System C |
|---|---|---|
| £120,000 | £100,000 | £85,000 |
Each system has a range of functionality, but they do differ quite a bit in what they offer. While they would all do the jobs that Biz Training are looking for, they would need the firm to run their systems very differently and so the expected cash flows from each system are very different. The expected net cash flows (income - expenses) for each system are as follows:
| Year | System A | System B | System C |
|---|---|---|---|
| 1 | £65,000 | £45,000 | £15,000 |
| 2 | £55,000 | £35,000 | £30,000 |
| 3 | £35,000 | £35,000 | £30,000 |
| 4 | £15,000 | £25,000 | £40,000 |
| 5 | £25,000 | £15,000 | £45,000 |
The firm is assuming a discount rate of 10% and this means that they need to apply a discount factor as follows:
| Year 1 | 0.909 |
|---|---|
| Year 2 | 0.826 |
| Year 3 | 0.751 |
| Year 4 | 0.683 |
| Year 5 | 0.621 |
Now have a go at the questions associated with this case study.
