Investment Appraisal

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To: Managing Director (MD) From: Management Accountant Subject: Investment of £840 000 in machinery. Date: 25 December 2010(NB assumed date since project starts 2011) Reference: Inv/App Introduction The purpose of this report is to assess the manner in which information is presented and investment decisions made by Greinam International (GI), consider the relevance of cost figures and other information, calculate the minimum return required and the Net Present Value (NPV) of the project and finally, recommend the course of action with respect to the investment of £840 000 in machinery. Presentation of information The manner in which information is presented can be assessed using the ACCURATE1 mnemonic. Accuracy…show more content…
Relevance of cost figures and other information In order to assess the viability of the project, only relevant figures provided by financial accountants are included in calculations. Furthermore, additional information obtained during meetings with senior managers have been considered. Machinery The initial outlay of £840 000 at the start of the project and the residual value of £80 000 at the end of 2014 are taken into consideration. In addition, cash inflow of £25 000 resulting from the sale of existing machinery is accounted for. Also, it is assumed that savings of £30 000 per annum is not already reflected in the cost figures for materials and labour. That is, it will be included as a cash inflow in the updated calculations. Working capital An outflow of £120 000 at the start of the project and an inflow of £72 000 (60% of amount invested) at the end occurs. Materials The expenditure of £100 000 already incurred on materials for the first year represent a sunk cost, with the exception of £40 000 recoverable as scrap value. Hence, only the latter amount is relevant. Labour Operations Supervisor costs of £40 000 p.a. is added to labour costs. Other production expenses/ Administrative overhead Fixed overheads costs at 20% of labour costs are deducted from “Other production
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