Section 2 – Investment appraisal: Use the information below to answer questions 6-10 Scenario:

International B & L Ltd. wishes to engage in a 5-year project of producing domestic innovative children’s
wears that are biodegradable and they come in three different designs. The research conducted by a
specialised team, working solely on this project incurred a cost of £85,000 over the course of two years
of conducting both their technical and market research. The company currently borrows at the rate of
20%, i.e., its cost of capital. Below are the forecast figures, which have been provided by the relevant
experts within the company: 1. It is anticipated that the yearly profit will be as follows: Years Yearly
profit £’000 Year 1 250 Year 2 100 Year 3 100 Year 4 150 Year 5 55 6 2. The company will need to
immediately buy a special machine for the project, which costs £500,000. The machine has a residual
value of £50,000 after five years (i.e., the machine can be sold as scrap for £50,000 after its useful life of
5 years). The company uses the straight-line depreciation method. 3. 20% DF (Discount factor) Year
Discount factor 0 1 1 0.833 2 0.694 3 0.579 4 0.482 5 0.402 Required: Conduct a project appraisal project
using relevant techniques, namely: Payback period method; ARR (Accounting rate of return) and NPV
(Net present value). Advise International B & L Ltd. if they should embark on the project or not, and
justify your reasons using the results from your computations. Explain your reasons for your answer in
this regard. 6. What is the payback period? (i) 2 years and 9 months (ii) 4 years and 3 months (iii) 1 year
and 10 months (iv) 3 years and 3 months 7. What is the depreciation figure? (i) £90,000 (ii) £200,000 (iii)
£120,000 (iv) £55,000 7 8. What is the net present value (NPV) figure? (i) £334,110 (ii) £223,500 (iii)
£122,659 (iv) £219,160 9. What is the ARR (Accounting rate of return), where ARR is: Average Annual
Profits x 100% Original Investment (i) 11.8% (ii) 16.4% (iii) 18.2% (iv) 26.2% 10. What is the ARR
(Accounting rate of return), where ARR is: Average Annual Profits x 100% Average investment (i) 33.6.9%
(ii) 39.5% (iii) 47.6% (iv) 31.8%

Q8 was wrong

Q9 was wrong