Determine the financial viability of the investment by calculating the project’s: Payback.
Question 2
Heavens Limited is a large retail organisation considering investing in a new project, for which the following information is available:
Initial Investment £4,500,000
Life of Project 8 years
Estimated annual cash inflow £800,000 per annum
Residual Value £200,000
The company has a cost of capital of 7%, but uses a 9% hurdle rate when assessing capital projects.
Required
a)
Determine the financial viability of the investment by calculating the project’s:
·
Payback
·
Accounting Rate of Return
·
Net Present Value (Using the cost of capital)
·
Net Present Value (Using the hurdle rate)
(10%)
b)
Explain in detail the results of your calculations in part (a) of this question. Ensure that you state whether the project should be undertaken. Justify your answer.
(Candidates are encouraged to research what constitutes a reasonable return in today’s business environment).
Determine the financial viability of the investment by calculating the project’s: Payback