CLASS / COURSE: Investment Analysis
A company is considering 3 possible projects; A, B and C. The financial details related to each are provided below:
Project A: Investment in a product development which is anticipated to require £100,000 development costs, but will return sales revenues of £75,000 in year 1, £225,000 in Year 2, £100,000 in Year 3 and zero thereafter. Profits are assumed to be 40% of the sales revenues.
Project B: Investment in an IT upgrade that will improve company effectiveness. The investment cost is expected to be £250,000, but will enable the company to save scrap of £20,000 per year, reduce its workforce by 2 administrators (salary costs of £50,000 per year). The life of the IT system is anticipated to be 5 years.
Project C: Investment in a project to increase the usable life of a production line. The current line cost £300,000 5 years ago, and by a new investment of £125,000 its life can be extended for another 4 years. Currently the line produces products which realise a profit of £50,000 per annum.
The discount rate to be considered is a minimum of 10%.
Define what is meant by the term sunk costs in the context of investment appraisal (10 marks)
Select 3 separate and distinct financial evaluation methods, and discuss their relative advantages and disadvantages. (30 marks)
Using 3 separate and distinct financial evaluation methods, advise management as to which option is the preferred investment. (Show all calculations in your answer) (60 marks)
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SUBJECTS / CATEGORIES:
2. Investment and Portfolio Management
3. Business and Finance Case Studies