Orion Robotics Ltd manufactures industrial robots for warehouse automation. The company is considering investing $450,000 in new production equipment that would generate constant annual net cash flows of $90,000. It will use the payback period to assess the investment.
Define the term 'payback period'.
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Sunrise Solar PLC, a renewable energy company, plans to install solar panels in commercial buildings across Southeast Asia. For 2024, SSP has identified two potential projects with different payback periods.
State two advantages of using the payback period method.
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Pacific Shipping Corporation operates container vessels across Asia. In 2024, PSC is considering two expansion projects: purchasing a new vessel or upgrading port facilities. It will use the average rate of return method to compare the projects.
State two advantages of using the Average Rate of Return (ARR) to compare investments.
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Qatar Healthcare Group operates medical facilities across the Middle East. For 2024, QHG is using the ARR to analyse investment proposals for new diagnostic equipment.
State two disadvantages of using ARR to compare investment options.
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Global Cargo Hubs Plc is evaluating international infrastructure projects. When analysing a proposal for a potential airport development, GIH uses the net present value (NPV) approach.
Define the term 'Net Present Value' (NPV).
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Nordic Wind Power AS develops offshore wind farms in Scandinavia. The company uses discount factors and the net present value (NPV) to evaluate long-term projects.
State two advantages of using NPV to compare investment options.
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Malaysian Tech Solutions develops software applications. In 2024, MTS must consider non-financial factors when evaluating investments.
State two non-financial factors affecting investment decisions.
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TechFlow, a start-up software company, is considering investing in a new AI tool for £50,000. It wants to calculate the simple payback period to determine how quickly it will recover its investment, as cash flow is a key priority.
Explain one reason why TechFlow might use the simple payback period to evaluate its investment.
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SolarTech Panels is a company specialising in solar energy solutions for residential and commercial properties. The business is considering investing £500,000 in a new production facility to meet increasing demand for solar panels.
The new facility is expected to generate net cash inflows of £150,000 per year for five years. SolarTech is evaluating the investment using the simple payback period and average rate of return (ARR) methods. Additionally, management is factoring in qualitative aspects, such as the environmental benefits of expanding solar energy production and aligning with its corporate social responsibility goals.
Explain one advantage and one disadvantage of using the simple payback period method to evaluate SolarTech Panels’ investment.
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SolarTech Panels is a company specialising in solar energy solutions for residential and commercial properties. The business is considering investing £500,000 in a new production facility to meet increasing demand for solar panels.
The new facility is expected to generate net cash inflows of £150,000 per year for five years. SolarTech is evaluating the investment using the simple payback period and average rate of return (ARR) methods. Additionally, management is factoring in qualitative aspects, such as the environmental benefits of expanding solar energy production and aligning with its corporate social responsibility goals.
Describe two factors SolarTech Panels should consider when evaluating its investment in the new production facility.
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Fresh Spring Foods produces premium organic snacks for health-conscious consumers. The company is evaluating an investment of £300,000 in automated packaging machinery to increase production efficiency. The machinery is expected to generate annual net cash inflows of £80,000 for the next six years.
Fresh Spring is using the Net Present Value (NPV) method to evaluate the investment. Management is also considering qualitative factors, such as the potential to reduce waste and improve the company’s reputation for sustainability. However, they are aware of the complexity of forecasting long-term cash flows and the challenge of choosing the appropriate discount rate.
Explain one advantage and one disadvantage of using the Net Present Value (NPV) method to evaluate Fresh Spring Foods’ investment.
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Fresh Spring Foods produces premium organic snacks for health-conscious consumers. The company is evaluating an investment of £300,000 in automated packaging machinery to increase production efficiency. The machinery is expected to generate annual net cash inflows of £80,000 for the next six years.
Fresh Spring is using the Net Present Value (NPV) method to evaluate the investment. Management is also considering qualitative factors, such as the potential to reduce waste and improve the company’s reputation for sustainability. However, they are aware of the complexity of forecasting long-term cash flows and the challenge of choosing the appropriate discount rate.
Analyse two advantages and one disadvantage to Fresh Spring Foods of prioritising qualitative factors in its decision to invest in automated packaging machinery.
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EcoHabitat Homes designs and builds eco-friendly modular housing. The company is considering an investment of £400,000 in new technology to improve its construction processes. The technology is projected to generate annual net cash inflows of £120,000 over the next five years.
EcoHabitat is evaluating the investment using the Net Present Value (NPV) method. Management is also considering non-financial factors, such as the potential to enhance its sustainability credentials and support its mission to reduce environmental impact. The company is keen to balance financial metrics with qualitative benefits while ensuring the investment aligns with its long-term strategic goals.
Describe two factors EcoHabitat Homes should consider when selecting the appropriate discount rate for its NPV calculation.
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EcoHabitat Homes designs and builds eco-friendly modular housing. The company is considering an investment of £400,000 in new technology to improve its construction processes. The technology is projected to generate annual net cash inflows of £120,000 over the next five years.
EcoHabitat is evaluating the investment using the Net Present Value (NPV) method. Management is also considering non-financial factors, such as the potential to enhance its sustainability credentials and support its mission to reduce environmental impact. The company is keen to balance financial metrics with qualitative benefits while ensuring the investment aligns with its long-term strategic goals.
Analyse two advantages and one disadvantage to EcoHabitat Homes of using the Average Rate of Return (ARR) instead of the Net Present Value (NPV) to determine whether its investment in new technology is worthwhile.
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2 marksEcoHeat Ltd manufactures energy-efficient heating systems for residential properties. The company is considering investing in new production machinery costing $120,000. The expected net cash flows from the machinery vary over the next five years due to seasonal demand. Management wants to determine how quickly the investment will pay for itself.
Annual net cash flow:
Year 1 ($) | Year 2 ($) | Year 3 ($) | Year 4 ($) | Year 5 ($) |
|---|---|---|---|---|
35,000 | 30,000 | 25,000 | 20,000 | 18,000 |
Cumulative net cash flow:
Year 1 ($) | Year 2 ($) | Year 3 ($) | Year 4 ($) | Year 5 ($) |
|---|---|---|---|---|
35,000 | 65,000 | 90,000 | 110,000 | 128,000 |
Calculate the payback period for EcoHeat Ltd’s investment (show all your working).
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2 marksBrightPrint Ltd specialises in producing high-quality business cards and marketing materials. The company is considering an investment of $120,000 in new printing equipment to improve efficiency and expand capacity. The expected total returns from the investment over five years are $210,000. BrightPrint also expects to incur an annual maintenance cost of $5,000 for the new equipment.
Investment Details | Amount ($) |
|---|---|
Initial Investment | 120,000 |
Total Returns Over 5 Years | 210,000 |
Annual Maintenance Costs | 5,000 |
Expected Lifespan of Equipment | 5 Years |
Calculate the average rate of return (ARR) for BrightPrint Ltd’s investment (show all your working).
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2 marksSolarBright Ltd manufactures solar-powered lighting solutions for residential and commercial use. The company is considering investing in a new production line costing $250,000. The investment is expected to generate returns over five years. An 8% discount rate has been applied to calculate the discounted cash flows, reflecting inflation and opportunity cost. Management wants to determine if the project is financially viable. The discounted cashflows are:
Year 1 ($) | Year 2 ($) | Year 3 ($) | Year 4 ($) | Year 5 ($) |
|---|---|---|---|---|
65,100 | 68,800 | 67,150 | 66,600 | 64,600 |
Calculate the Net Present Value (NPV) for SolarBright Ltd’s investment (show all your working).
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