## Quantitative factors - numerical questions (2)

#### Question 1

The manager of O'Neill Biochemical Ltd is considering relocation of the processing facilities. He has narrowed down the choices to two options. Data relevant for this decision is as follows:

#### Location A

This location is in Michigan and, although a cheaper option, there would be higher operating costs due to the higher wages that would need to be offered to recruit suitable workers. The capital cost of plant A is \$5 million.

#### Location B

This location is in Houston would be very near transport links, which would save the firm money, but the site is relatively expensive. The capital cost of plant B is \$10 million.

Forecast information for each of the plants was produced as follows:

Location A Location A Location B Location B
Revenue receipts Operating payments Revenue receipts Operating payments
\$ million \$ million \$ million \$ million
Year 1 7.3 4.0 7.3 2.7
Year 2 7.5 5.2 7.5 3.3
Year 3 9.1 5.3 9.1 4.6
Year 4 9.8 6.5 9.8 5.5
Year 5 11.2 8.1 11.2 6.4

1. A modification to the plant at location B to treat the pollution would need an extra capital cost of \$2 million. In addition, operating payments would increase in each year by \$400,000.
2. The company's cost of capital is 10% per annum.
3. The following extract is from the present value table for \$1 at 10% per annum.
 Year 1 0.909 0.826 0.751 0.683 0.621

#### Required

Produce net present value calculations for the locations A and B. For Location B provide figures both for the plant in its basic form and also with the modifications to treat pollution.

#### Question 2

Flanders Ltd is trying to decide which project should be taken up, out of three possible investments. The initial investment would amount to \$40,000. Scrap value at the end of use would be nil.

The cost of capital is 9%, for which discount factors are as follows:

Year Present value of \$1
1 0.917
2 0.842
3 0.772
4 0.708
5 0.650

The net cash inflows from the three projects under consideration are:

XC1 VB93 IPR2
\$ \$ \$
Year 1 5,000 14,000 11,000
Year 2 8,000 16,000 12,000
Year 3 6,000 21,000 13,000
Year 4 12,000 - 14,000
Year 5 18,000 - -

#### Required

For each possible project you are required to calculate:

(i) Payback
(ii) Net present value