Accounting 9706 · AS & A Level · Investment appraisal

Investment appraisal — practice question

Marie is weighing up a project to make a new product. To produce it, she must purchase a new machine costing $250 000, and the machine is expected to last for 4 years.
(a)[7]

Set out a table showing the project’s expected annual net cash flows.

(b)[4]

Calculate the project’s Net Present Value (NPV).

(c)[3]

Calculate the Accounting Rate of Return (ARR) for the project.

(d)[3]

Recommend whether or not Marie should go ahead with the project. Justify your answer.

(e(i))[2]

Calculate for Year 1 the sensitivity of the project profit to the selling price.

(e(ii))[2]

Calculate for Year 1 the sensitivity of the project profit to the material cost.

(f)[4]

Explain what the figures found in (e)(i) and (e)(ii) show.

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