Assuming directors of Unilever PLC have decided to purchase a new machine to enhance the capacity to benefit from the expected increase in demand of their two products, ‘Personal Care’ and ‘Home Care’. Two versions of machines are available from different manufacturers at the same cost of € 600M. Both machines have six years useful life and will be sold at estimated price of € 60M at the end of sixth year. The company will use straight line method for depreciation of these machines. Cost of capital for both machines is 8%. The directors are to purchase one machine from the available two, same cost and net cash inflow from both machines is confusing them to take decision. You are Finance Manager of Unilever PLC and directors have asked you to produce a report which should highlight the economic feasibility for decision making for next AGM. Further information regarding net cash inflow from both machines is provided below: Personal Care Home Care Years-->Cashflow(€M)-->Cashflow(€M) 0--> (600)--> (600) 1--> 300--> 95 2-->250--> 100 3-->200-->150 4--> 150-->200 5--> 100 -->250 6--> 95 -->300 Task 2A: You are required to calculate (2-decimal places) using the following investment appraisal techniques, and provide recommendations as to the economic feasibility of acquiring the suitable machine: a. The Payback Period. b. The Discounted Payback Period. c. The Accounting Rate of Return. d. The Net Present Value. e. The Internal Rate of Return (to two decimal places)

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

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Assuming directors of Unilever PLC have decided to purchase a new machine to enhance the capacity to benefit from the expected increase in demand of their two products, ‘Personal Care’ and ‘Home Care’. Two versions of machines are available from different manufacturers at the same cost of € 600M. Both machines have six years useful life and will be sold at estimated price of € 60M at the end of sixth year. The company will use straight line method for depreciation of these machines. Cost of capital for both machines is 8%. The directors are to purchase one machine from the available two, same cost and net cash inflow from both machines is confusing them to take decision. You are Finance Manager of Unilever PLC and directors have asked you to produce a report which should highlight the economic feasibility for decision making for next AGM.

Further information regarding net cash inflow from both machines is provided below:

Personal Care

Home Care Years-->Cashflow(€M)-->Cashflow(€M)

0--> (600)--> (600)

1--> 300--> 95

2-->250--> 100

3-->200-->150

4--> 150-->200

5--> 100 -->250

6--> 95 -->300

Task 2A:

You are required to calculate (2-decimal places) using the following investment appraisal techniques, and provide recommendations as to the economic feasibility of acquiring the suitable machine:

a. The Payback Period.

b. The Discounted Payback Period.

c. The Accounting Rate of Return.

d. The Net Present Value.

e. The Internal Rate of Return (to two decimal places)

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