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.
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) 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)