BLC Ltd. is a medium-sized UK manufacturing company based in Liverpool. The comp
ID: 2423491 • Letter: B
Question
BLC Ltd. is a medium-sized UK manufacturing company based in Liverpool. The company is seeking to expand its operations with the establishment of an office block to house the marketing and human resources staff in Manchester.
The company has narrowed the choice to two alternatives with the following net cash flow information being available:
Year
Property 1
Property 2
£000s
£000s
0
(2,500)
(2,750)
1
1,000
900
2
500
700
3
600
800
4
1,000
600
5
900
700
Items to keep in mind:
The company’s current cost of capital is 10%.
For this assignment, ignore taxation.
Required
As the company accountant is currently on holiday you are required, by calculating net present value, internal rate of return and payback, to advise the company which option they should take.
You should also critically evaluate the other qualitative factors that might be taken into account in this decision.
Year
Property 1
Property 2
£000s
£000s
0
(2,500)
(2,750)
1
1,000
900
2
500
700
3
600
800
4
1,000
600
5
900
700
Explanation / Answer
NPV =present value of cash inflow - present value of cash outflow
Property 1
Year
Cash flow
Present value factor
0
(2500)
1
(2500)
1
1000
0.9091
909.0909
2
500
0.8264
413.2231
3
600
0.7513
450.7889
4
1000
0.6830
683.0135
5
900
0.6209
558.8292
Net Present value
515
Property 2
Year
Cash flow
Present value factor
0
(2750)
1
(2750)
1
900
0.9091
818.19
2
700
0.8264
578.48
3
800
0.7513
601.04
4
600
0.6830
409.8
5
700
0.6209
434.63
Net Present value
92
Property 1
NPV at 17 % = 3.064898
NPV at 18 %=-19.0845
By interpolating we get = 17 % + 3.06/22.1494 = 17.138
Property 2
NPV at 15 % = 29
NPV at 16 %=-26.744
By interpolating we get = 15 % + 29/55.744 = 15.52 %
property 1
payback period = 3 year + (2500-2100)/ (3100-2100) = 3.40 year
property 2
payback period = 3 year + (2750-2400)/ (3000-2400) = 3.5833 year
Property 1 is better option as NPV is higher and payback period is lowwer than property 2
Year
Cash flow
Present value factor
0
(2500)
1
(2500)
1
1000
0.9091
909.0909
2
500
0.8264
413.2231
3
600
0.7513
450.7889
4
1000
0.6830
683.0135
5
900
0.6209
558.8292
Net Present value
515
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