Chapter 36 Investment appraisal

Q1 Joloss plc

Workings Milligan Bentine

Net receipts $000 Year 1 70 – (50 – 25) = 45 72 – (60 – 33) = 45
2 80 – (60 – 25) = 45 84 – (70 – 33) = 47
3 90 – (65 – 25) = 50 90 – (75 – 33) = 48
4 90 – (70 – 25) = 45 100 – (80 – 33) = 53

(i) Milligan Bentine

NPV
Factor (10%) Year $ $ $ $
1.000 0 (100 000) (100 000) (130 000) (130 000)
0.909 1 45 000 40 905 45 000 40 905
0.826 2 45 000 37 170 47 000 38 822
0.751 3 50 000 37 550 48 000 36 048
0.683 4 45 000 30 735 53 000 36 199
Net present values 46 360 21 974

(ii) Choose Milligan: greater NPV

(iii) IRR for Milligan

20% $
1.000 Year 0 (100 000)
0.833 1 37 485
0.694 2 31 230
0.579 3 28 950
0.482 4 21 690
19 355

IRR: 10% + (10% × 46 360

46 360
- 19 355
) = 27.2%
The machine meets the required return on outlay.

Q2 Jane Pannell Ltd

(a) Annual depreciation = $120 0004- $20 000 = $25 000

Average profit = $[80 000 – (46 000 + 25 000)] = $9000
ARR = 609000
000
× 100 = 15%

(b) NPV at 10% $

Year 0 Payment (120 000)
Years 1–4 $(80 000 – 46 000) × 3.169 107 746
Year 4 add $20 000 × 0.683 13 660
NPV 1 406

(c) At 15% $
Year 0 Payment (120 000)
Years 1–4 $(34 000 × 2.856) 97 104
Year 4 add $20 000 × 0.572 11 440
NPV (11 456)

IRR = 10% + (5% × 14061406

+ 11 456
) = 10.5%