The finance director of a limited company is considering a number of investment projects in the leisure sector to expand the business. Name or Project Initial outlay Profit stream A £1.2m £400k at the end of each year for 4 years Loss of £1k per year for 2 years, followed by profit of £30k per year for 2 years £10k | £1.0m | £600k at the end of each year for 3 years At the end of each year (for 3 years) there is a 50% chance of a £500k profit and a 50% chance of a £100k loss £0.4m (You may assume that all profits and losses are made at the end of the year in question. You do not need to consider part years) i) Without doing any detailed calculations but giving your reasons, state which of the above projects would be expected to have the greatest IRR (internal rate of return). i) Calculate the IRR (to the nearest whole percentage) for the project you have chosen in part i) explaining how you have estimated your initial approximation. ii) Performing any calculations you need state which of the projects would be invested in if the investment criterion was to exceed an IRR of 30%. iv) Your investment advisor says he believes project D has a net present value of £0 when taking a discount rate of 20%. Describe how you think your investment advisor may be treating the uncertainty in the cashflows.
The finance director of a limited company is considering a number of investment projects in the leisure sector to expand the business. Name or Project Initial outlay Profit stream A £1.2m £400k at the end of each year for 4 years Loss of £1k per year for 2 years, followed by profit of £30k per year for 2 years £10k | £1.0m | £600k at the end of each year for 3 years At the end of each year (for 3 years) there is a 50% chance of a £500k profit and a 50% chance of a £100k loss £0.4m (You may assume that all profits and losses are made at the end of the year in question. You do not need to consider part years) i) Without doing any detailed calculations but giving your reasons, state which of the above projects would be expected to have the greatest IRR (internal rate of return). i) Calculate the IRR (to the nearest whole percentage) for the project you have chosen in part i) explaining how you have estimated your initial approximation. ii) Performing any calculations you need state which of the projects would be invested in if the investment criterion was to exceed an IRR of 30%. iv) Your investment advisor says he believes project D has a net present value of £0 when taking a discount rate of 20%. Describe how you think your investment advisor may be treating the uncertainty in the cashflows.
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 4CE: Manzer Enterprises is considering two independent investments: A new automated materials handling...
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Transcribed Image Text:The finance director of a limited company is considering a number of investment projects in the
leisure sector to expand the business.
Name or Project
Initial outlay
Profit stream
A
£1.2m
£400k at the end of each year
for 4 years
Loss of £1k per year for 2
years, followed by profit of
£30k per year for 2 years
£10k
| £1.0m
| £600k at the end of each year
for 3 years
At the end of each year (for 3
years) there is a 50% chance
of a £500k profit and a 50%
chance of a £100k loss
£0.4m
(You may assume that all profits and losses are made at the end of the year in question. You do
not need to consider part years)
i) Without doing any detailed calculations but giving your reasons, state which of the above
projects would be expected to have the greatest IRR (internal rate of return).
i) Calculate the IRR (to the nearest whole percentage) for the project you have chosen in part i)
explaining how you have estimated your initial approximation.
ii) Performing any calculations you need state which of the projects would be invested in if the
investment criterion was to exceed an IRR of 30%.
iv) Your investment advisor says he believes project D has a net present value of £0 when taking
a discount rate of 20%. Describe how you think your investment advisor may be treating the
uncertainty in the cashflows.
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