Discounted payback period

BMF – Mar July 2020 – L1 – SB – Q6 -Basics of Business Finance and Financial Markets

Evaluating two projects based on discounted payback period and advising management.

Question

Perfumes Nigeria Limited is considering the purchase of a new machine and has two alternatives. The company uses discounted payback period as a criterion for project selection and has a policy of not investing in any project unless the discounted payback period is less than 4 years. The expected cash flow profiles of the two projects are as shown below:

Year	Machine Perf. (₦)	Machine Fumes (₦)
2020	(2,000,000)	(2,000,000)
2021	200,000	1,000,000
2022	400,000	1,000,000
2023	1,200,000	200,000
2024	1,400,000	100,000
2025	1,600,000	100,000

The company’s cost of capital is 10%.

Required:
Evaluate the two projects and offer your advice to support the investment decision of the management of the company. Assume 360 days make a year and express discounted payback period in years plus days. Show all workings. (20 marks)

Answer

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Tags: Decision Making, Discounted payback period, Investment Appraisal
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAR/JULY 2020

MA – May 2021 – L2 – Q4a – Discounted cash flow

Evaluate two machines using Net Present Value and Discounted Payback Period methods to determine the preferred investment.

Question

a) Oseikrom Ventures is considering minimising its production cost through automation of its production system. Two machines are being considered to save cost. The estimated data for the two machines available on the market are as follows:

	Machine A (GH¢’000)	Machine B (GH¢’000)
Initial cost (Year 0)	120,000	120,000
Residual value (Year 5)	20,000	30,000
Working capital requirement (Year 0)	15,000	10,000

Annual cost savings:

Year	1	2	3	4	5
Machine A	40,000	40,000	40,000	20,000	20,000
Machine B	20,000	30,000	50,000	70,000	20,000

The company’s cost of capital is 10%.

Required:
Using the following methods, which machine should be selected?
i) Net Present Value (8 marks)
ii) Discounted Payback Period (4 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Budgeting, Discounted payback period, Investment Appraisal, Net Present Value
Level: Level 2

Topic: Discounted cash flow
Series: MAY 2021

FM – March 2023 – L2 – Q4 – DCF: taxation and inflation | Introduction to Investment Appraisal

Explain the stages in the capital investment decision-making process, compute the discounted payback period and Return on Capital Employed for an investment proposal, and describe categories of financial markets with examples.

Question

a) Explain the stages in the Capital Investment decision-making process. (5 marks)

b) Dragon Ltd is evaluating an investment proposal to manufacture a product called “Chiputronic” and the information below has been provided by the Research and Development team:

Initial Investment: GH¢4 million
Selling Price (current price terms): GH¢40 per unit
Expected Selling Price Inflation: 3% per annum
Variable Operating Cost (current price terms): GH¢16 per unit
Fixed Operating Cost (current price terms): GH¢340,000
Expected Operating Cost Inflation: 4% per annum

Year	Annual Demand (units)
1	70,000
2	90,000
3	130,000
4	50,000

It is expected that whatever is produced will be sold with no stock left, and there will be no scrap value expected at the end of the four years. The discount rate used in the company is 15%.

Required:
i) Compute the discounted payback period. (5 marks)
ii) Calculate the Return on Capital Employed (Accounting Rate of Return) based on average investment. (5 marks)

c) Financial markets facilitate the interaction between those who need funds and those who have funds to invest.

Required:
Explain TWO (2) categories of financial markets and give TWO (2) examples of each. (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Investment, Discounted payback period, Financial Markets, Investment decision-making, Return on Capital Employed
Level: Level 2

Topic: DCF: taxation and inflation, Introduction to Investment Appraisal
Series: MAR 2023

BMF – Mar July 2020 – L1 – SB – Q6 -Basics of Business Finance and Financial Markets

Evaluating two projects based on discounted payback period and advising management.

Question

Year	Machine Perf. (₦)	Machine Fumes (₦)
2020	(2,000,000)	(2,000,000)
2021	200,000	1,000,000
2022	400,000	1,000,000
2023	1,200,000	200,000
2024	1,400,000	100,000
2025	1,600,000	100,000

The company’s cost of capital is 10%.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Decision Making, Discounted payback period, Investment Appraisal
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAR/JULY 2020

MA – May 2021 – L2 – Q4a – Discounted cash flow

Evaluate two machines using Net Present Value and Discounted Payback Period methods to determine the preferred investment.

Question

	Machine A (GH¢’000)	Machine B (GH¢’000)
Initial cost (Year 0)	120,000	120,000
Residual value (Year 5)	20,000	30,000
Working capital requirement (Year 0)	15,000	10,000

Annual cost savings:

Year	1	2	3	4	5
Machine A	40,000	40,000	40,000	20,000	20,000
Machine B	20,000	30,000	50,000	70,000	20,000

The company’s cost of capital is 10%.

Required:
Using the following methods, which machine should be selected?
i) Net Present Value (8 marks)
ii) Discounted Payback Period (4 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Budgeting, Discounted payback period, Investment Appraisal, Net Present Value
Level: Level 2

Topic: Discounted cash flow
Series: MAY 2021

FM – March 2023 – L2 – Q4 – DCF: taxation and inflation | Introduction to Investment Appraisal

Explain the stages in the capital investment decision-making process, compute the discounted payback period and Return on Capital Employed for an investment proposal, and describe categories of financial markets with examples.

Question

a) Explain the stages in the Capital Investment decision-making process. (5 marks)

b) Dragon Ltd is evaluating an investment proposal to manufacture a product called “Chiputronic” and the information below has been provided by the Research and Development team:

Initial Investment: GH¢4 million
Selling Price (current price terms): GH¢40 per unit
Expected Selling Price Inflation: 3% per annum
Variable Operating Cost (current price terms): GH¢16 per unit
Fixed Operating Cost (current price terms): GH¢340,000
Expected Operating Cost Inflation: 4% per annum

Year	Annual Demand (units)
1	70,000
2	90,000
3	130,000
4	50,000

It is expected that whatever is produced will be sold with no stock left, and there will be no scrap value expected at the end of the four years. The discount rate used in the company is 15%.

Required:
i) Compute the discounted payback period. (5 marks)
ii) Calculate the Return on Capital Employed (Accounting Rate of Return) based on average investment. (5 marks)

c) Financial markets facilitate the interaction between those who need funds and those who have funds to invest.

Required:
Explain TWO (2) categories of financial markets and give TWO (2) examples of each. (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Investment, Discounted payback period, Financial Markets, Investment decision-making, Return on Capital Employed
Level: Level 2

Topic: DCF: taxation and inflation, Introduction to Investment Appraisal
Series: MAR 2023

Question Tag: Discounted payback period

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BMF – Mar July 2020 – L1 – SB – Q6 -Basics of Business Finance and Financial Markets

Evaluating two projects based on discounted payback period and advising management.

MA – May 2021 – L2 – Q4a – Discounted cash flow

Evaluate two machines using Net Present Value and Discounted Payback Period methods to determine the preferred investment.

FM – March 2023 – L2 – Q4 – DCF: taxation and inflation | Introduction to Investment Appraisal

Explain the stages in the capital investment decision-making process, compute the discounted payback period and Return on Capital Employed for an investment proposal, and describe categories of financial markets with examples.

BMF – Mar July 2020 – L1 – SB – Q6 -Basics of Business Finance and Financial Markets

Evaluating two projects based on discounted payback period and advising management.

MA – May 2021 – L2 – Q4a – Discounted cash flow

Evaluate two machines using Net Present Value and Discounted Payback Period methods to determine the preferred investment.

FM – March 2023 – L2 – Q4 – DCF: taxation and inflation | Introduction to Investment Appraisal

Explain the stages in the capital investment decision-making process, compute the discounted payback period and Return on Capital Employed for an investment proposal, and describe categories of financial markets with examples.

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BMF – Mar July 2020 – L1 – SB – Q6 -Basics of Business Finance and Financial Markets

Evaluating two projects based on discounted payback period and advising management.

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MA – May 2021 – L2 – Q4a – Discounted cash flow

Evaluate two machines using Net Present Value and Discounted Payback Period methods to determine the preferred investment.

You're reporting an error for "MA – May 2021 – L2 – Q4a – Discounted cash flow"

FM – March 2023 – L2 – Q4 – DCF: taxation and inflation | Introduction to Investment Appraisal

Explain the stages in the capital investment decision-making process, compute the discounted payback period and Return on Capital Employed for an investment proposal, and describe categories of financial markets with examples.

You're reporting an error for "FM – March 2023 – L2 – Q4 – DCF: taxation and inflation | Introduction to Investment Appraisal"

BMF – Mar July 2020 – L1 – SB – Q6 -Basics of Business Finance and Financial Markets

Evaluating two projects based on discounted payback period and advising management.

You're reporting an error for "BMF – Mar July 2020 – L1 – SB – Q6 -Basics of Business Finance and Financial Markets"

MA – May 2021 – L2 – Q4a – Discounted cash flow

Evaluate two machines using Net Present Value and Discounted Payback Period methods to determine the preferred investment.

You're reporting an error for "MA – May 2021 – L2 – Q4a – Discounted cash flow"

FM – March 2023 – L2 – Q4 – DCF: taxation and inflation | Introduction to Investment Appraisal

Explain the stages in the capital investment decision-making process, compute the discounted payback period and Return on Capital Employed for an investment proposal, and describe categories of financial markets with examples.

You're reporting an error for "FM – March 2023 – L2 – Q4 – DCF: taxation and inflation | Introduction to Investment Appraisal"

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