Finance - Investment
Case study - Questions
Before trying these questions make sure you have looked at the case material (it may perhaps be worth printing it out to help with the questions). You can print out this worksheet to fill in all the answers. You could also try the further task which introduces some added complications.
Part 1 - Payback period
Use the expected net cash flow data in the case material to work out the payback period for each of the systems. Work your answer out in years and months if necessary.
System A: Payback period __________ years __________ months
System B: Payback period __________ years __________ months
System C: Payback period __________ years __________ months
Part 2 - Average rate of return
Use the expected net cash flow data in the case material to work out the average rate of return for each of the systems. Show your workings below.
Average rate of return - System A __________ %
Average rate of return - System B __________ %
Average rate of return - System C __________ %
Part 3 - Discounted cash flow
Use the expected net cash flow data in the case material to work out the net present value for each of the systems. Show your workings below.
We have a given a table for you to use as the basis of your calculations:
| Year | System A | Present value - A | System B | Present value - B | System C | Present value - 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 | |||
| Total present value | ||||||
| Less: capital cost | £120,000 | £100,000 | £85,000 | |||
| Net present value |
The firm is assuming a discount rate of 10% and so the discount factors to use are:
| Year 1 | 0.909 |
|---|---|
| Year 2 | 0.826 |
| Year 3 | 0.751 |
| Year 4 | 0.683 |
| Year 5 | 0.621 |
Part 4 - Which system is best?
Write a report for the firm to use giving recommendations/information as follows:
- Which system they should use on the basis of each investment appraisal method
- Which system would be best overall taking into account the results from all three methods
- Non-financial issues they should be aware of when choosing their system
- The possible limitations of investment appraisal
