Exam code: 7132
A company invests £20 million into a new project in Year 0.
In the next two years the predicted net returns of the project, along with the discount factors, are shown in the table below:
Year | Net return (£m) | Discount factor |
1 | 11 | 0.91 |
2 | 12 | 0.83 |
Based on the information provided, calculate the expected net present value (NPV) for the new project.
Was this exam question helpful?
Read the case study in the Insert (opens in a new tab).
Should Sanjay add ‘slushy’ machines to his three branches?
Use quantitative and qualitative information and calculations to support your answer.
Was this exam question helpful?
AJS plc
AJS plc is a manufacturer of non-recyclable packaging. This packaging is widely used by takeaway food outlets. AJS plc plans to invest £500 000 in new technology to increase capacity and make its factory more capital intensive.
Appendix A Data on proposed investment (produced by AJS plc’s operations manager)
Year | Annual net cash flow | Discount factor |
0 | (500) | 1.00 |
1 | (50) | 0.91 |
2 | 250 | 0.83 |
3 | 600 | 0.75 |
Appendix B UK market for non-recyclable takeaway food packaging
Appendix C UK market for recyclable takeaway food packaging
Appendix D Selected Human Resource data 2022
AJS plc | Industry average | |
Average salary | £22 000 | £26 000 |
Salary costs as a percentage of turnover (%) | 40 | 35 |
Labour turnover (%) | 15 | 4 |
Working days lost through industrial action | 24 | 5 |
Average number of applicants for vacancies | 14 | 55 |
Appendix E Selected Financial data for AJS plc
2022 | |
Current assets | £550 000 |
Current liabilities | £550 000 |
Non-current liabilities | £4m |
Operating profit | £3m |
Gearing | 22% |
Change in the share price of AJS plc over the year | –15% |
Change in the share price of the top 100 UK companies over the year | +8% |
Calculate the Net Present Value for AJS plc’s proposed investment.
Was this exam question helpful?
A business’s decision to increase its level of capital expenditure is most likely to:
achieve long-term growth.
achieve short-term profits.
avoid cash flow problems.
reduce gearing levels.
Was this exam question helpful?
Table 2 below shows investment appraisal data for four projects.
Table 2 Investment appraisal data
Project | Initial cost (£m) | Net return (£m) | ||
Year 0 | Year 1 | Year 2 | Year 3 | |
A | (12) | 12 | 10 | 0 |
B | (15) | 10 | 12 | 15 |
C | (16) | 18 | 0 | 0 |
D | (20) | 19 | 15 | 4 |
Which project has the best payback?
Project A
Project B
Project C
Project D
Was this exam question helpful?
Read the case study in the Insert (opens in a new tab).
Should AM plc invest in building its new factory at Site A or Site B?
Use quantitative and qualitative information to justify your view.
Was this exam question helpful?
The table below shows the net annual return of an investment.
Year | Net return |
0 | (1000) |
1 | 500 |
2 | 900 |
After two years, the ARR (%) for this investment is
90%
70%
40%
20%
Was this exam question helpful?
Drake Hotels PLC owns 20 budget hotels in the UK. Each one is located in a different city. The industry is very competitive and Drake’s managers all have an objective to help the business to be as efficient as possible.
Drake Hotels PLC’s operating profit for the financial year 2019–20 was £18 million. Last month the company appointed a new Chief Executive, Mary Myers, to increase the profitability of the business. Mary was previously the Marketing Manager of an upmarket hotel chain.
Mary is already considering an investment proposal for a luxury hotel in Oxford. This hotel would target overseas visitors who might want to visit the city. Drake Hotels has found a suitable building but needs to invest to develop it.
Appendix A Investment appraisal results for the proposed investment into a new hotel in Oxford (based on net inflows for first eight years).
Average rate of return 12% per year
Net Present Value £25 million
Source: Chief Executive
Appendix B Sensitivity analysis for the new Oxford hotel investment proposal
Two possible changes in the economy that might affect the investment appraisal results in Appendix A | Estimated probability of this change happening |
The value of the pound against other currencies is 10% higher than originally forecasted. | 20% |
The average GDP growth in overseas countries is 1.5% higher than originally forecasted. | 30% |
Source: Chief Executive
Appendix C Selected financial data for Drake Hotels PLC
£ million as at 1 May 2020 | |
Current assets | 15 |
Current liabilities | 18 |
Total equity | 170 |
Non-current liabilities | 280 |
Appendix D Forecasted data for Drake Hotels PLC’s new Oxford hotel investment proposal
Initial investment required £20 million
Estimated income elasticity of demand +2
Percentage of customers visiting from overseas 70%
Estimated cost of borrowing for this investment 8% per annum
Appendix E Room bookings by month and day of the week in Drake Hotels PLC’s budget hotels 2019
Use Appendix B to explain one reason why Drake Hotels PLC has used sensitivity analysis for the investment proposal.
Was this exam question helpful?
Drake Hotels PLC owns 20 budget hotels in the UK. Each one is located in a different city. The industry is very competitive and Drake’s managers all have an objective to help the business to be as efficient as possible.
Drake Hotels PLC’s operating profit for the financial year 2019–20 was £18 million. Last month the company appointed a new Chief Executive, Mary Myers, to increase the profitability of the business. Mary was previously the Marketing Manager of an upmarket hotel chain.
Mary is already considering an investment proposal for a luxury hotel in Oxford. This hotel would target overseas visitors who might want to visit the city. Drake Hotels has found a suitable building but needs to invest to develop it.
Appendix A Investment appraisal results for the proposed investment into a new hotel in Oxford (based on net inflows for first eight years).
Average rate of return 12% per year
Net Present Value £25 million
Source: Chief Executive
Appendix B Sensitivity analysis for the new Oxford hotel investment proposal
Two possible changes in the economy that might affect the investment appraisal results in Appendix A | Estimated probability of this change happening |
The value of the pound against other currencies is 10% higher than originally forecasted. | 20% |
The average GDP growth in overseas countries is 1.5% higher than originally forecasted. | 30% |
Source: Chief Executive
Appendix C Selected financial data for Drake Hotels PLC
£ million as at 1 May 2020 | |
Current assets | 15 |
Current liabilities | 18 |
Total equity | 170 |
Non-current liabilities | 280 |
Appendix D Forecasted data for Drake Hotels PLC’s new Oxford hotel investment proposal
Initial investment required £20 million
Estimated income elasticity of demand +2
Percentage of customers visiting from overseas 70%
Estimated cost of borrowing for this investment 8% per annum
Appendix E Room bookings by month and day of the week in Drake Hotels PLC’s budget hotels 2019
Using the data, recommend whether Drake Hotels PLC should go ahead with the proposed investment. Justify your answer.
Was this exam question helpful?
Read the case study in the Insert.
DWS Ltd is considering investing in solar panels.
Using Appendix D calculate the payback period and the Average Rate of Return of this investment.
Based on your results and other information, recommend whether DWS Ltd should make this investment. Justify your decision.
Was this exam question helpful?
An approach to examine the impact of possible changes on the predicted financial outcome of an investment is known as
investment criteria.
non-financial factors.
sensitivity analysis.
the discount rate.
Was this exam question helpful?
The data in Figure 4 shows the expected financial outcomes of an investment into new equipment.
Figure 4
Year | Annual inflows (£000) | Annual outflows (£000) | Net return (£000) | Discount factor (5%) |
0 | 0 | 50 | (50) | 1.00 |
1 | 30 | 17 | 13 | 0.95 |
2 | 40 | 12 | 28 | 0.91 |
3 | 40 | 13 | 27 | 0.86 |
Based on the data in Figure 4, calculate the payback of the investment.
Was this exam question helpful?
Figure 4
Year | Annual inflows (£000) | Annual outflows (£000) | Net return (£000) | Discount factor (5%) |
0 | 0 | 50 | (50) | 1.00 |
1 | 30 | 17 | 13 | 0.95 |
2 | 40 | 12 | 28 | 0.91 |
3 | 40 | 13 | 27 | 0.86 |
Based on the data in Figure 4, calculate the Net Present Value of the investment.
Was this exam question helpful?