The following data relates to the two projects:
Project PE3 ER5
Initial Cost 205,000 150,000
Profits: Year 1 35,000 30,000
Year 2 50,000 25,000
Year 3 10,000 – 50,000
Year 4 10,000 10,000
Year 5 50,000 3,000
Year 6 2,000
- All cash flows take place at the end of the year apart from the original investment in the project which takes place at the beginning of the project.
- Project PE3 machinery is to be disposed of at the end of year 5 with a scrap value of £5,000.
- Project ER5 machinery is to be disposed of at the end of the year 3 with a nil scrap value and replace with new project machinery that will cost £100,000.
- The cost of this additional machinery has been deducted in arriving at the profit projections for ER5 for year 3. It is projected that it will last for three years and have a Nil scrap value.
- The company’s policy is to depreciate its assets on a straight line basis.
- The discount rate to be used by the company is 10%.
- Using appropriate investment appraisal techniques advise senior management whether they should opt for project PE3 or Project ER5.
- Discuss the limitations of using investment appraisal technique to aid long term decision making.
(Total 30 marks)
- All calculations must be detailed and presented clearly.
- Use of published work (citing references) within text is expected.
- A full list of references should be presented at the end of the case study.
- Please avoid the use of ‘I, We, Us’ in your case study. You are expected to write in third person.
- Include the assignment front sheet and marking scheme which is attached to the assignment brief.
- Your answer should not repeat the question as it will be included in your word count.
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- Font size 11/12.
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- Good use of English, referencing, presentation will earn marks.
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Accounting and Finance Penalties
- Word Count*: All assessments have a word count with a tolerance of 10% only. Submissions that exceed the word count will be penalised as follows-one grade point* for every 150 words or part thereof.
- Missing References – penalty is three grade points minimum (see module guide for further details).
- Front sheet missing-penalty one grade point.
- Word count missing or inaccurate-penalty one grade point.
** Front sheet, contents page, references and any appendices do not count in the word count.