A manufacturing business is considering investing in some new equipment. The management accountant h

 
   

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A manufacturing business is considering investing in some new equipment. The management accountant has estimated the future net cash flows from the investment as follows.

Initial investment

(£1,360,000)

Year 1

£470,000

Year 2

£580,000

Year 3

£580,000

Year 4

£500,000

This business uses straight-line depreciation and its cost of capital (the discount rate for investment appraisal is 10%). It is assumed that the new equipment will have a residual value of zero at the end of four years.

Required: Calculate the payback period, accounting rate of return (ARR) and

(6 marks)

(6 marks) the net present value (NPV) for the proposed investment.

(6 marks) Advise the business whether, on financial grounds, it should invest in the new equipment.

(2 marks) Explain why the NPV method is considered superior to the payback period and accounting rate of return methods of appraising potential capital investments.

(10 marks) Explain the effect of non-financial/non-quantitative factors on project appraisal by using relevant examples.

(10 marks) (Question 3 total: 40 marks)