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McGhee & Co plc

Investment Appraisal
Part A - i
2011

2012

Net Trading Income (less


depreciation)
3,540,000
Initial Cost of equipment
- 12,000,000
Discount Factor @ 13.5%
1.000
0.881
Discounted Cashflow
- 12,000,000 3,118,943
NPV

689,033

2013

2014

2015

2016

4,071,000

5,310,000 3,363,000 1,416,000

0.776
3,160,162

0.684
0.603
3,631,675 2,026,485

0.531
751,768

McGhee & Co plc


Investment
Appraisal
Part A - i
2011
Net Trading Income (less
depreciation)
Initial Cost of equipment -
Discount Factor @ 13.5%
Discounted Cashflow
-
NPV

12,000,000
1.000
12,000,000

689,033

Discount Factor @ 18%


Discounted Cashflow

1.000
12,000,000

NPV

490,897

2012

2013

2014

2015

2016

3,540,000 4,071,000 5,310,000 3,363,000 1,416,000


0.881
0.776
0.684
0.603
3,118,943 3,160,162 3,631,675 2,026,485

0.531
751,768

0.847
0.718
0.609
0.516
3,000,000 2,923,729 3,231,830 1,734,598

0.437
618,947

Formula
IRR = L + [PvL/PvL - PvH x (H - L)]
13.5% + [689033/689033 - (-490897) * (18% - 13.5%)

IRR

13.5% + [689033/1179930 * 4.5%]


0.135 + 0.58 * 0.045
16.11%

Discount Factor
@16.04%
Discounted Cashflow

1.000
12,000,000

0.862
0.743
0.640
0.552
3,050,653 3,023,293 3,398,312 1,854,749

0.475
672,994

NPV

McGhee & Co plc


Investment Appraisal
Part A - ii
2011
Net Trading Income
(less
depreciation)
Initial Cost of equipment
Corporate Tax
Discount Factor @ 13.5%
Tax Relief on WDA's
Net Cash inflows/outflows
Discounted Cashflow
NPV

2012

12,000,000
12,000,000
269,299

Calculations
2011

2012
2013
2014
2015
2016

2014

2015

2016

3,540,000

4,071,000

5,310,000 3,363,000 1,416,000

-
0.881
672,000
4,212,000
3,711,013

991,200
0.776
537,600
3,617,400
2,808,050

1,139,880
0.684
430,080
4,600,200
3,146,220

2017

12,000,000
1.000

-
-
-

2013

Initial Capital Cost


WDA @ 20%
Written Down Value
WDA @ 20%
Written Down Value
WDA @ 20%
Written Down Value
WDA @ 20%
Written Down Value
WDA @ 20%
Written Down Value
Swappage Value
Balancing Allowance

Tax Relief @ 28%


12,000,000
2,400,000
672,000
9,600,000
1,920,000
537,600
7,680,000
1,536,000
430,080
6,144,000
1,228,800
344,064
4,915,200

983,040
275,251
3,932,160
None
3,932,160
1,101,005

Timing of Relief
2012
2013
2014
2015
2016

2017

- 1,486,800
0.603
344,064
2,220,264
1,337,892

941,640
0.531
275,251
749,611
397,976

396,480
0.468
1,101,005
704,525
329,550

McGhee & Co plc


Investment Appraisal
Part A - iii
Sensitivity to:
Minimum selling price

2012
2013
2014
2015
2016

Yearly Sales
15,200,000
17,480,000
22,800,000
14,440,000
6,080,000

Discount Factor
@ 13.5%
0.881
0.776
0.684
0.603
0.531

Total

Discounted Yearly
Sales

13,392,070

13,569,058

15,593,631

8,701,292

3,227,931

Formula = NPV/Discounted
Sales*100
689033/54483983*100
Sensitivity to sales price

54,483,983

1.26%

Maximum variable cost

2012
2013
2014
2015
2016

Variable Cost

11,660,000

13,409,000

17,490,000

11,077,000

4,664,000

Total
Formula = NPV/Variable
Cost*100
689033/41794950*100
Sensitivity to variable cost

Minimum volume
Total discounted sales
Total discounted variable
cost
Formula = NPV/sales less
variable cost*100
689033/5448398341794950*100
Sensitivity to volume

Discount Factor
@ 13.5%
0.881
0.776
0.684
0.603
0.531

Discounted Variable
Cost

10,273,128

10,408,896

11,961,957

6,674,807

2,476,163

41,794,950

1.65%

54,483,983

41,794,950

5.43%

Maximum initial investment


Formula = NPV/Pv of cash
flows*100
689033/12000000*100
Sensitivity to initial
investment

5.74%

Maximum cost of capital


IRR = Difference in discount
factor to make NPV = 0
16.11 % - 13.5%
Sensitivity to cost of capital

2.61%