Part A BLC Ltd. is a medium-sized UK manufacturing company based in Liverpool. T

Question

Part A

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:

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 of property 1 = £514.95(000)

NPV of property 2 = £92.20(000)

IRR is the rate at which PV of cash outflows = PV of cash inflows or NPV = 0, By trying various rate in the table above for calculation of NPV as zero, we get,

IRR of Property 1 = 17.65% (approx)

IRR of Property 2 = 11.39% (approx)

Payback period = Initial Investment/ Cash Flows to recover investment

Property 1 = 3 years + 400/1000 = 3.40 years

Property 2 = 3 years + 350/600 = 3.58 years

On analysing the above three, we find that Property 1 is more beneficial since it has a higher NPV and IRR than Property 2 and lower Payback period.

Qualitative factors such as enviornamental concerns on using these properties, ethical considerations, strategic importance of the project to company etc much also be evaluated while evaluating the alternatives.

(in £000s) Year Property 1 Property 2 PV Factor @ 10% PV of Property 1 PV of Property 2 0 -2500 -2750 1 -2500 -2750 1 1000 900 0.9091 909.09 818.18 2 500 700 0.8264 413.22 578.51 3 600 800 0.7513 450.79 601.05 4 1000 600 0.6830 683.01 409.81 5 900 700 0.6209 558.83 434.64 Net Present Value 514.95 92.20

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