Yongyuan AC103 AC104 sol 1415.pdf

Yongyuan AC103 AC104 sol 1415.pdf - 1 THE LONDON SCHOOL OF...

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1 1 THE LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE Department of Accounting: AC103 /AC104 Notes on solution for Lent Term 2015 Week 9 class YONGYUAN MANUFACTURING COMPANY PLC REQUIRED: solution (a) For each machine calculate (i) Net present value (NPV) Both positive: A £27,470 < B £80,850 (ii) Payback period: A is about 4yrs 4mths; shorter than B which is about 4yrs 11mths (iii) Internal rate of return (IRR): A approx. 6.2% < B approx. 6.5% (iv) Accounting rate of return (ARR) for the first year (based on opening capital): A approx. 2% < B approx. 4% (v) Average annual accounting rate of return (ARR) over the whole life (based on average capital employed overall): A approx. 7.92% > B approx. 7.89% For detailed calculations of numerical solutions and workings see accompanying spreadsheet. (b) In the light of your calculations above discuss (i) Whether you would recommend each of the machines as an investment, giving your reasons. As both have positive NPV, and therefore IRR above the cost of capital, both are acceptable on the assumption that capital markets are functioning well and liquidity is unlikely to be a problem. Acceptance should maximise the stockmarket wealth of shareholders.
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