As an Alphabet Holdings Plc junior management accountant, the Finance Director wants your calculations and recommendation regarding an expansion plan the Board is considering, which includes a chain of factory outlet stores. Below are the figures for the first one that is planned for a central Birmingham location next year. Company policy dictates that any decision should be based on the results of calculating Net Present Value (NPV) of 3 years of cash flows using a cost of capital of 12%, Payback Period (PBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a 5% cushion in case of increases in inflation or interest rates. The investment consists of £100,000 for the land, building costs of £158,000, and £36,600 for fittings and equipment. The cash flows in year 1 are expected to be: total sales revenue £600,600; the cost of Axor products sold £165,900; Bozon stock sold £118,860; staff costs £24,780; light & heat £35,196; other overheads £134,904. The cash flows for years 2 and 3 are the same, but are expected to increase by 2% inflation each year. Requirements for Question 3 Using the information above and in accord with the above stated company policy you are required to calculate: Net Present Value (NPV) Payback period (PBP) and Discounted Payback Period (DPBP) Internal Rate of Return
As an Alphabet Holdings Plc junior
Below are the figures for the first one that is planned for a central Birmingham location next year.
Company policy dictates that any decision should be based on the results of calculating
The investment consists of £100,000 for the land, building costs of £158,000, and £36,600 for fittings and equipment.
The cash flows in year 1 are expected to be: total sales revenue £600,600; the cost of Axor products sold £165,900; Bozon stock sold £118,860; staff costs £24,780; light & heat £35,196; other overheads £134,904. The cash flows for years 2 and 3 are the same, but are expected to increase by 2% inflation each year.
Requirements for Question 3
Using the information above and in accord with the above stated company policy you are required to calculate:
- Net Present Value (NPV)
- Payback period (PBP) and Discounted Payback Period (DPBP)
Internal Rate of Return
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