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Company R is considering investing in a project that has an outflow in years one and
two of 100,000 a year, followed by an annual inflow from years three to seven of
50,000. The companys cost of capital is 8 per cent. Should R invest in this project?
Years
1-2
3-7
Discount rate
(0.926 + 0.857) = 1.783
(5.206 1.783) = 3.423
Present value
178,300
171,150
NPV 7,150
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TECHNICAL | IDEC
Question 4(a)
DigitPP owns 20 print and computer shops. At present it hires its
35 photocopying machines from Rentit at an annual rental of
5,600, payable monthly. (Assume year-end cash flows for
simplicity.) The rental agreement covers a 24-hour repair service
that helps DigitPP to maintain its high reputation for a quick and
reliable service. DigitPP estimates that each machine generates
7,600 of contribution each year.
XX company is trying to break into the UK market and offers to
sell DigitPP new machines for 18,000 each, payable on
installation. DigitPP is considering this and has found some
research which suggests that each machine stands a 0.7 chance
of being reliable and a 0.3 chance of being unreliable. The
PV ()
18,000
5,000
13,000
Question 5
MN plc has a rolling programme of investment decisions. One of these is to consider
mutually exclusive investments A, B and C. The following information has been
produced by the investment manager:
Project
Initial investment
Cash inflow for A, years 1 to 3
Cash inflow for B, years 1 to 6
Cash inflow for C, years 1 to 9
Net present value at 10% pa
Ranking
Internal rate of return
Ranking
Investment decision
A
B
105,000
187,000
48,000
48,000
14,376
3
17.5%
1
22,040
2
14%
2
C
245,000
48,000
31,432
1
13%
3
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