BUSINESS FINANCE
Case 4 – Capital Budgeting Case Study – Sugar Company
A College is considering investing in its own transport fleet (School buses).
Currently, the transportation has been contracted to an outside organization.
The initial cost of the transport fleet would be AED 1,500 000 and also require AED 275,000 investment in working capital. The life of the transport fleet would be 8 years, after which time the vehicles would have to be scrapped with no salvage value, at the end of 8 years, using the Double Declining Balance method.
The management has come up with the following Revenues and Cost data for the next 8 years. Sales to its customers will amount to AED 210,000 for the next four years and then increase to AED 290,000 for the last four years.
To raise funds for the project your company is proposing to raise a long-term loan at 10% interest rate per annum.
You are told that there is an alternative project that could be invested in using the funds which has the following projected results:
• Payback period = 7 years
• Accounting rate of return = 20%
• Net present value = AED 245,000
As funds are limited, investment can only be made in one project.
Note: The transport fleet would be purchased at the beginning of the project and all other expenditure would be incurred at the end of each relevant year.
Required:
1. Project should do in Microsoft Excel Software. It will be 6 sheets each sheet has name problem solving:
a) Net cash flow
b) Depreciation
c) Payback period
d) NPV
e) IRR
f) Memo
2. Prepare a table showing the net cash flows over the life of the IT Machinery project. (For 8 years what is money coming in and money going out?)
3. Calculate the following for the IT Machinery project:
(i) Payback period
(ii) Accounting rate of return
(iii) Net present value
4. Write a short memo (4 paragraphs) to the Investment Manager in your company explaining whether the company should invest in the IT Machinery project or choose the alternative project available. You must clearly explain the reasons for your decision.
Not:
You can use the other attach files may help you to complete this task.
Case 4 – Capital Budgeting Case Study – Sugar Company
A College is considering investing in its own transport fleet (School buses).
Currently, the transportation has been contracted to an outside organization.
The initial cost of the transport fleet would be AED 1,500 000 and also require AED 275,000 investment in working capital. The life of the transport fleet would be 8 years, after which time the vehicles would have to be scrapped with no salvage value, at the end of 8 years, using the Double Declining Balance method.
The management has come up with the following Revenues and Cost data for the next 8 years. Sales to its customers will amount to AED 210,000 for the next four years and then increase to AED 290,000 for the last four years.
To raise funds for the project your company is proposing to raise a long-term loan at 10% interest rate per annum.
You are told that there is an alternative project that could be invested in using the funds which has the following projected results:
• Payback period = 7 years
• Accounting rate of return = 20%
• Net present value = AED 245,000
As funds are limited, investment can only be made in one project.
Note: The transport fleet would be purchased at the beginning of the project and all other expenditure would be incurred at the end of each relevant year.
Required:
1. Project should do in Microsoft Excel Software. It will be 6 sheets each sheet has name problem solving:
a) Net cash flow
b) Depreciation
c) Payback period
d) NPV
e) IRR
f) Memo
2. Prepare a table showing the net cash flows over the life of the IT Machinery project. (For 8 years what is money coming in and money going out?)
3. Calculate the following for the IT Machinery project:
(i) Payback period
(ii) Accounting rate of return
(iii) Net present value
4. Write a short memo (4 paragraphs) to the Investment Manager in your company explaining whether the company should invest in the IT Machinery project or choose the alternative project available. You must clearly explain the reasons for your decision.
Not:
You can use the other attach files may help you to complete this task.
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