Investment Appraisal: The Gamma Pl case Gamma Pl is considering buying a new machine to expand their production of office furniture. The machine costs El . 3 million and will last for 5 years. The scrap value of these machines is El 50,000. It is expected that the asset will be sold for this value on the last day of the fifth year, and that a replacement machine will then be purchased. An investment of IEEE,OHO In working capital will be needed Initially. The projected financial data are reported below. Projected financial data (E) Year 1 Year 2 Year 3 Year 4 Year 5 Sales
The machine would be financed with a 4-year bank loan at an interest rate of 1 1. 5%, and would be bought on the last day of the company’s previous financial ear. . The expenditure on materials and components, and labor is directly related to the project and would be avoided should this not be undertaken. 3. Advertising costs are paid yearly. 4. The overheads are a fair allocation of the production costs that will be incurred if the new machine is purchased. 5. The cost of capital for this type of investment Is 10 per cent. The directors set a target accounting rate of return on investment of 12 per cent and a payback period of three years for all projects. Ignore taxation and inflation. BUSSING-0206 Financial Management A.
Y. 2013-14 Dry Francesca Gaillardia (f. [email protected] AC. UK) Required Assume that you are an external consultant to Gamma Pl. You are required to apply a range of methods to carry out an Investment appraisal of the project and, based on your results, prepare a written report In which you provide a firm recommendation as to whether the company should Invest In this project. You are also required to: 1) evaluate the robustness of your findings, making reference to appropriate theory In investment appraisal, cost of capital and risk; 2) discuss what other sources of