Question - Doggy Clean Pty Ltd is considering investing in a new dog washing device with a higher pressure lower volume water flow system. This will reduce the amount of water used per dog wash and save approximately 2,000 litres of water per year. They expect that some customers will appreciate the benefit of saving water in Queensland and that the new device will attract new customers.
The following information has been provided:
Research costs to date $5,000
Cost of machine purchase $59,872
Expected increase in customer numbers per year - 200 new customers in first year and it is expected that these same 200 will stay for the life of the project
Contribution per customer per annum $100
Cost per litre of water - $0.01
Expected life of dog wash device (zero residual value) - 5 years
Cost of capital/desired minimum rate of return - 5%
Amortisation of research costs - Straight line
Doggy Clean Pty Ltd has a desired Payback Period of 2 years
(a) Calculate the payback period of the project.
(b) Calculate the Accounting Rate of Return (ARR) of the project.
(c) Calculate the Net Present Value (NPV) of the project.
(d) Calculate the Internal Rate of Return (IRR) of the project.
(e) Based on these calculations alone, should Doggy Clean Pty Ltd buy the machine?
Use your calculations to justify your answer.
(f) Are there non-economic considerations in making this decision? Explain.