Accounts and finance

Table of Contents

1. Topic pack - Accounts and finance - introduction
2. 3.1 Sources of finance - notes
3. 3.1 Sources of finance - questions
4. 3.2 Investment appraisal - notes
5. Investment appraisal
6. 3.2 Investment appraisal - questions
   1. Payback & ARR - self-test questions
   2. Discounted cash flow - self-test questions
   3. Inv. appraisal techniques - short answer questions
   4. Quantitative factors - numerical questions (1)
   5. Quantitative factors - numerical questions (2)
   6. Investment appraisal - quantitative factors - numerical questions 2
7. 3.3 Working capital - notes
8. 3.3 Working capital - questions
9. 3.4 Budgeting - notes (HL only)
10. 3.4 Budgeting - questions
11. 3.5 Final accounts - notes
12. 3.5 Final accounts - questions
13. 3.5 Final accounts - simulations and activities
14. 3.6 Ratio analysis - notes
15. 3.6 Ratio analysis - questions
16. 3.6 Ratio analysis - simulations and activities
17. Printable version

Investment appraisal - quantitative factors - numerical questions 2

Question 1

Wells Ltd is considering extending its operations into the production and sale of components used in the making of lawnmowers. The components cost $7 to manufacture and would be sold on to the lawnmower manufacturer for $12. A new machine will be needed costing $10,000 which is payable on 1 January in Year 1.

The expected sales of these are as follows:

The cost of capital is 10%.

The following is an extract from the present value table for a cost of capital of 10%:

It is assumed that revenues are received and costs are paid off at the end of each year.

It is assumed that everything produced is sold

(a) Calculate the annual net cash flows for each year, which are expected to result from the purchase of the machine.
(b) Using the expected annual net cash flows, calculate the net present value for the machine.

Question 2

The assembly machine of Tahoulan Ltd could be replaced. The replacement machine will cost $400,000, which is payable on 1 January in Year 1. The new machine will be able to assemble 24,000 units a year. However, this is expected to rise by 25% from the start of year 4.

The cost of capital is 10%.

• The following is an extract from the present value table for a cost of capital of 10%:

• It is assumed that revenues are received and costs are paid off at the end of each year.
• It is assumed that everything produced is sold
• Each unit of production costs $25 to manufacture, but will rise to $32 in year 3 and $35 in year 4 onwards.
• Each unit is expected to sell for $35 in years 1 and 2 rising by 10% (compound) in years 3 and 4, thereafter remaining constant.

Should the assembly machine be replaced?