Practice questions:
Kerry Melrose has a conference organising business and is thinking of buying some computer-controlled audio visual equipment. She has done her calculations on a cash basis and has discovered that the equipment will cost £10,000. At the end of the first year she will have to spend £5,000 on training and advertising, and this should generate an additional £1,000 worth of business. I n the second year, she estimates that the advertising costs will reduce to £3.000, but an additional £2,000 worth of business will be generated. In the third and fourth years no advertising will be required and the additional business generated will be £3,000 in year 3 and £8,000 in year 4. Kerry believes that by the end of year 5 the equipment will be out of date, but she should be able to generate a further £6,000 worth of business in that year and be able to sell the equipment at the end of the year for £4,000.
Write a report for Kerry Melrose which shows:
a. the payback period of the project
b. the net present value of the project using a discount rate of 12%
c. an explanation of the two techniques, and an interpretation of their results
d. your recommendation as to whether Kerry should go ahead with the project. and any financial considerations she should bear in mind.