Exam Standard Question 10 - Sleet Plc Sleet plc is preparing its capital budget and is considering four projects. Financial details of these projects are as follows. Project A Project B Project C Initial investment £750,000 £800,000 £900,000 Net present value £370,000 £430,000 £400,000 These three projects are divisible and cannot be deferred or repeated. Project D This is an essential investment in equipment to purify the toxic waste of Sleet plc. An initial investment of £1,000,000 is expected to lead to savings by avoiding fines and waste disposal costs. Forecast annual volumes of toxic waste are as follows: Year 1 2 3 4 Volume (units) 15,000 18,000 21,600 25,900 Savings will be £20 per processed unit. Fixed operating costs will be £53,000 per year and variable operating costs will be £1 per processed unit. These values do not take account of anticipated inflation of 4% per year in savings and 5% per year in both fixed and variable operating costs. Other information The directors of Sleet plc have decided that capital investment funds will be limited to £3,000,000. They have agreed that Project D is essential and must be undertaken. Sleet plc has a nominal (money) cost of capital of 10%. Required: (a) Calculate the net present value of Project D and comment on your findings. (9 marks) (b) Determine the best way for Sleet plc to invest the available capital investment funds and prepare an optimum investment schedule for the company. (5 marks) (c) Discuss the reasons why capital investment funds may be rationed. (6 marks) (d) Describe the limitations of accounting rate of return as an investment appraisal method. (5 marks) (Total: 25 marks)Exam Standard Question 10  - Sleet Plc

 

Sleet plc is preparing its capital budget and is considering four projects. Financial details of these projects are as follows.

 

 

Project A Project B Project C   

Initial investment £750,000 £800,000 £900,000   

Net present value £370,000 £430,000 £400,000  

 

These three projects are divisible and cannot be deferred or repeated.

 

Project D

This is an essential investment in equipment to purify the toxic waste of Sleet plc. An initial investment of £1,000,000 is expected to lead to savings by avoiding fines and waste disposal costs. Forecast annual volumes of toxic waste are as follows:

 

 

Year 1 2 3 4   

Volume (units) 15,000 18,000 21,600 25,900  

 

Savings will be £20 per processed unit. Fixed operating costs will be £53,000 per year and variable operating costs will be £1 per processed unit. These values do not take account of anticipated inflation of 4% per year in savings and 5% per year in both fixed and variable operating costs.

 

Other information

The directors of Sleet plc have decided that capital investment funds will be limited to £3,000,000. They have agreed that Project D is essential and must be undertaken. Sleet plc has a nominal (money) cost of capital of 10%.

 

 

Required:

 

(a) Calculate the net present value of Project D and comment on your findings.

(9 marks)

 

(b) Determine the best way for Sleet plc to invest the available capital investment funds and prepare an optimum investment schedule for the company.

(5 marks)

 

(c) Discuss the reasons why capital investment funds may be rationed.

(6 marks)

 

(d) Describe the limitations of accounting rate of return as an investment appraisal method.

(5 marks)

(Total: 25 marks)