Aspect Ltd is considering investing £600,000 into a new machine that will enable them to produce a ergonomic office chair over the next 5 years. The company managers have asked for your help to put together a capital expenditure proposal for the new machine and are conscious that they will only get the ‘go ahead’ to invest if the project has a payback period of less than 5 years, a positive NPV at the most appropriate discount rate and an ARR and IRR of greater than the weighted average cost of capital.
The £600,000 has been borrowed. Three quarters of the £600,000 has come from a bank loan with a return required of 11% and one quarter of the £600,000 come from equity with a return required of 15%.
The managers require you to put together a capital expenditure proposal, no longer than 1,500 words, containing:
An explanation of what investment appraisal is and why it is used (10 marks)
Results of the 4 main investment appraisal techniques (40 marks)
An explanation of what each technique shows and a detailed evaluation of the strengths and weaknesses of each technique (40 marks)
Recommendations on whether Aspect Ltd should invest in the new machine (10 marks)
The below information will be of use to your proposal:
Note: The company uses straight line depreciation. The machine will have no scrap value after 5 years.
Year Operating profit £
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