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    This document summarizes two investment appraisal cases: Milligan plc is considering two machines that have different net receipts and costs over four years. Calculating the net present value at a 10% discount rate shows that Milligan has a higher NPV of $46,360. The internal rate of return for Milligan is calculated to be 27.2%, above the required return. Jane Pannell Ltd is considering a machine that depreciates by $25,000 each year and averages a $9,000 profit. Calculating the NPV at 10% and 15% discount rates shows a positive NPV at 10% and an IRR of 10.5%, indicating the investment should be

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    Answers to the additional exercises of a-level accounting of chapter 36.Content may not be totally correct

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    This document summarizes two investment appraisal cases: Milligan plc is considering two machines that have different net receipts and costs over four years. Calculating the net present value at a 10% discount rate shows that Milligan has a higher NPV of $46,360. The internal rate of return for Milligan is calculated to be 27.2%, above the required return. Jane Pannell Ltd is considering a machine that depreciates by $25,000 each year and averages a $9,000 profit. Calculating the NPV at 10% and 15% discount rates shows a positive NPV at 10% and an IRR of 10.5%, indicating the investment should be

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    33 views2 pages

    Chapter 36

    Uploaded by

    kai68
    This document summarizes two investment appraisal cases: Milligan plc is considering two machines that have different net receipts and costs over four years. Calculating the net present value at a 10% discount rate shows that Milligan has a higher NPV of $46,360. The internal rate of return for Milligan is calculated to be 27.2%, above the required return. Jane Pannell Ltd is considering a machine that depreciates by $25,000 each year and averages a $9,000 profit. Calculating the NPV at 10% and 15% discount rates shows a positive NPV at 10% and an IRR of 10.5%, indicating the investment should be

    Copyright:

    © All Rights Reserved
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    of 2

    Chapter 36 Investment appraisal

    Q1

    Joloss plc

    Workings
    Net receipts $000

    Year 1
    2
    3
    4

    Milligan
    70 (50 25) = 45
    80 (60 25) = 45
    90 (65 25) = 50
    90 (70 25) = 45

    (i)
    Factor (10%)
    1.000
    0.909
    0.826
    0.751
    0.683

    Year
    $
    0
    (100 000)
    1
    45 000
    2
    45 000
    3
    50 000
    4
    45 000
    Net present values

    Bentine
    72 (60 33) = 45
    84 (70 33) = 47
    90 (75 33) = 48
    100 (80 33) = 53

    Milligan
    NPV
    $
    (100 000)
    40 905
    37 170
    37 550
    30 735
    46 360

    (ii) Choose Milligan: greater NPV


    (iii) IRR for Milligan
    20%
    1.000
    Year
    0.833
    0.694
    0.579
    0.482

    0
    1
    2
    3
    4

    $
    (100 000)
    37 485
    31 230
    28 950
    21 690
    19 355

    46 360
    IRR: 10% + (10% 46 360
    ) = 27.2%
    - 19 355

    The machine meets the required return on outlay.


    Q2
    (a)

    Jane Pannell Ltd


    Annual depreciation = $120 0004- $20 000 = $25 000
    Average profit = $[80 000 (46 000 + 25 000)] = $9000
    ARR = 609000
    100 = 15%
    000

    (b)

    NPV at 10%
    Year 0
    Payment
    Years 14 $(80 000 46 000) 3.169
    Year 4 add $20 000 0.683
    NPV

    (c) At 15%
    $
    Year 0
    Payment
    Years 14 $(34 000 2.856)
    Year 4 add $20 000 0.572
    NPV
    IRR = 10% + (5% 14061406
    ) = 10.5%
    + 11 456

    $
    (120 000)
    107 746
    13 660
    1 406

    (120 000)
    97 104
    11 440
    (11 456)

    Bentine
    $
    (130 000)
    45 000
    47 000
    48 000
    53 000

    $
    (130 000)
    40 905
    38 822
    36 048
    36 199
    21 974

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