1 Try to discover the extent to which NPV, IRR and MIRR are used in your organisation. Also try to..

1 Try to discover
the extent to which NPV, IRR and MIRR are used in your organisation. Also try
to gauge the degree of appreciation of the problems of using IRR.

2 If possible,
obtain data on a real project, historical or proposed, and analyse it using the
techniques learned in this chapter.

3 Imagine the
Ministry of Defence have spent £50m researching and developing a new guided
weapon system. Explain why this fact may be irrelevant to the decision on
whether to go ahead with production.

4 ‘Those business
school graduates don’t know what they are talking about. We have to
»

1 Try to discover
the extent to which NPV, IRR and MIRR are used in your organisation. Also try
to gauge the degree of appreciation of the problems of using IRR.

2 If possible,
obtain data on a real project, historical or proposed, and analyse it using the
techniques learned in this chapter.

3 Imagine the
Ministry of Defence have spent £50m researching and developing a new guided
weapon system. Explain why this fact may be irrelevant to the decision on
whether to go ahead with production.

4 ‘Those business
school graduates don’t know what they are talking about. We have to allocate
overheads to every department and activity. If we simply excluded this cost
there would be a big lump of costs not written off. All projects must bear some
central overhead.’ Discuss this statement.

 

Q18;

1 What is an annual
equivalent annuity?

2 What are the two
main techniques available for evaluating mutually exclusive repeated projects
with different lengths of life? Why is it not valid simply to use NPVs?

3 Arcmat plc owns a
factory which at present is empty. Mrs Hambicious, a business strategist, has
been working on a proposal for using the factory for doll manufacture. This
will require complete modernisation. Mrs Hambicious is a little confused about
project appraisal and has asked your advice about which of the following are
relevant and incremental cash flows.

a The future cost of modernising the factory.

b The £100,000 spent two months ago on a market survey
investigating the demand for these plastic dolls.

c Machines to produce the dolls – cost £10m payable on
delivery.

d Depreciation on the machines.

e Arcmat’s other product lines are expected to be more
popular due to the complementary nature of the new doll range with these
existing products – the net cash flow effect is anticipated at £1m.

f Three senior managers will be drafted in from other
divisions for a period of a year.

g A proportion of the US head office costs.

h The tax saving due to the plant investment being offset
against taxable income.

i The £1m of additional raw material stock required
at the start of production.

j The interest that will be charged on the £20m bank
loan needed to initiate this project.

k The cost of the utility services installed last
year.

 

Q19;

1 In a ‘make or buy’
type of decision should we also consider factors not easily quantified such as
security of supply, convenience and the morale of the workforce? (This question
is meant to start you thinking about the issues discussed in Chapter 4. You are
not expected to give a detailed answer yet.)

2 ‘Depreciation is a
cost recognised by tax authorities so why don’t you use it in project
appraisal?’ Help the person who asked this question.

3 A firm is
considering the implementation of a new project to produce slippers. The
already owned equipment to be used has sufficient spare capacity to allow this
new production without affecting existing product ranges. The production
manager suggests that because the equipment has been paid for it is a sunk cost
and should not be included in the project appraisal calculations. Do you accept
his argument?

 

»