the board of directors of kirkside glassware ltd is considering the following propos 644894
The board of directors of Kirkside Glassware Ltd is considering the following proposed investment projects:
|
Project |
Nature |
|
A |
Establishment of a staff training scheme |
|
B |
Major improvements to the electrical system |
|
C |
Installation of a computer |
|
D |
Development of a new product |
|
E |
Purchase of a warehouse space, presently leased |
It is estimated that each product will provide benefits in terms of reduced cash outflows, measured over the coming five years. The outlays and cash flow benefits, net of taxation, are set out below:
|
End of year |
Project A £ |
Project B £ |
Project C £ |
Project D £ |
Project E £ |
End of year |
|
Outlay |
– |
(40,000) |
(70,000) |
(180,000) |
(100,000) |
(200,000) |
|
Cash flow benefits: |
|
|
|
|
|
|
|
|
1 |
16,000 |
27,000 |
66,000 |
– |
145,000 |
|
|
2 |
16,000 |
27,000 |
66,000 |
– |
145,000 |
|
|
3 |
16,000 |
27,000 |
66,000 |
73,000 |
– |
|
|
4 |
16,000 |
27,000 |
66,000 |
73,000 |
– |
|
|
5 |
16,000 |
27,000 |
66,000 |
73,000 |
– |
|
Internal rate of return |
|
28.65% |
26.82% |
24.32% |
22.05% |
28.79% |
Each project has two separate phases of equal cost and providing equal cash flow benefits. The board is willing to consider adopting the first phase of any project without the second, if this appears necessary. Any project or phase not undertaken immediately may be postponed indefinitely. Capital available for investment is limited to £300,000. The board aims, as far as possible, to maximise the net present value of projects undertaken. The company requires a return of 10 per cent per annum based on the net cash flows of any project.
Required
Prepare a report to the board of directors:
(a) setting out a decision rule which could be applied in ranking the investment projects; and
(b) listing other factors which the board of directors might wish to consider when selecting projects for implementation.