Solved: You are the chief accountant of Deighton plc which

manufactures

You are the chief accountant of Deighton plc, which manufactures a wide range of building and
plumbing fittings. It has recently taken over a smaller unquoted competitor, Linton Ltd. Deighton
is currently checking through various documents at Linton's head office, including a number of
investment appraisals. One of these, a recently rejected application involving an outlay on
equipment of £900,000, is reproduced below. It was rejected because it failed to offer Linton's
target return on investment of 25 per cent (average profit-to-initial investment outlay).

Closer inspection reveals several errors in the appraisal.

Evaluation of profitability of proposed project NT17 (all values in current year prices)

You discover the following further details:

1 Linton's policy was to finance both working capital and fixed investment by a bank overdraft. A
12 per cent interest rate applied at the time of the evaluation.

2 A 25 per cent writing-down allowance (WDA) on a reducing balance basis is offered for new
investment. Linton's profits are sufficient to utilise fully this allowance throughout the project.

3 Corporation tax is paid a year in arrears.

4 Of the overhead charge, about half reflects absorption of existing overhead costs.

5 The market research was actually undertaken to investigate two proposals, the other project
also having been rejected. The total bill for all this research has already been paid.

6 Deighton itself requires a nominal return on new projects of 20 per cent after taxes is currently
ungeared and has no plans to use any debt finance in the future.

Required

Write a report to the finance director in which you:

(a) Identify the mistakes made in Linton's evaluation.

(b) Restate the investment appraisal in terms of the post-tax net present value to Deighton,
recommending whether the project should be undertaken or not.

Reach out to freelance2040@yahoo.com for enquiry.

 You are the chief accountant of Deighton plc which manufactures

ANSWER
https://solvedquest.com/you-are-the-chief-accountant-of-deighton-plc-which-manufactures/

Reach out to freelance2040@yahoo.com for enquiry.

Powered by TCPDF (www.tcpdf.org)