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    The document summarizes the calculations for (a) average rate of return (ARR), (b) payback period, and (c) considerations for project approval for an investment project. It calculates that the ARR is 24.0% which is above the hurdle rate of 18%. It determines that the payback period is 3 years and 4 months. It recommends further consideration of the project but notes that non-discounted techniques ignore the time value of money and other environmental factors should also be taken into account.

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    The document summarizes the calculations for (a) average rate of return (ARR), (b) payback period, and (c) considerations for project approval for an investment project. It calculates that the ARR is 24.0% which is above the hurdle rate of 18%. It determines that the payback period is 3 years and 4 months. It recommends further consideration of the project but notes that non-discounted techniques ignore the time value of money and other environmental factors should also be taken into account.

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    8 views1 page

    2 Workshop Solution 3

    Uploaded by

    Travelling UK
    The document summarizes the calculations for (a) average rate of return (ARR), (b) payback period, and (c) considerations for project approval for an investment project. It calculates that the ARR is 24.0% which is above the hurdle rate of 18%. It determines that the payback period is 3 years and 4 months. It recommends further consideration of the project but notes that non-discounted techniques ignore the time value of money and other environmental factors should also be taken into account.

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    Learning Activity 3 solution

    a) £
    Total Sales (370 + 666 + 1,199 + 2,158) 4,393
    Less: Production costs (222 + 400 + 719 + 1,295) (2,636)
    Less: Total depreciation (290 x 4) (1,160)
    Total profit 597

    Average annual profit (597/4) 149


    Average investment: (1,200 + 40)/2 620

    ARR = 149/620 x 100% = 24.0%

    b) £ £
    Initial investment (time 0) (1,200) (1,200)
    Net cash inflow (year 1)(370 - 222) 148 (1,052)
    Net cash inflow (year 2)(666 - 400) 266 (786)
    Net cash inflow (year 3)(1,199 - 719) 480 (306)
    Net cash inflow (year 4)(2,158 - 1,295) 863 557
    Realisation of assets (time 4) 40 597

    If net cash inflows occur evenly through the year then payback will occur in 4 th
    month of year 4(306/863). Payback is therefore, 3 years 4 months.

    c)
    ARR of the project is above the hurdle rate of 18% so the project should be
    considered further. The company should not rely solely on non-discounted
    techniques for appraising projects as these ignore the time value of money.
    Environment factors should also be considered, such as building in an area of
    outstanding natural beauty and also the health effects of toxic gases.

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