Question 1- Investment Appraisal Techniques

Superior Tasty Soup (STS) Limited a fast food company is considering purchasing a new storage machine for £438,700. The company is expecting an annual cash inflow of £123,000 from the sale of its products and an annual cash outflow of £25,500 for each of the six years of the machine’s useful life. The annual cash outflows do not include annual depreciation charges for the machine. The machine is depreciated using 27% reducing method. The machine is expected to last for six years, with a residual value estimated to be at the rate of 15% of the original cost of the machine. The cost of capital for (STS) Limited is 13%.

You are required to:

(a) Calculate (to two decimal places) using the following investment appraisal techniques, and provide brief recommendations as to the economic feasibility of acquiring the machine:

The Payback Period.
The Accounting Rate of Return.
The Net Present Value.
iv. The Internal Rate of Return
(20 marks)

Alternatively, the financial director of (STS) Limited is proposing to use 40% the total capital outlay for the above investment to repurchase some of the equity capital and the remaining funds to pay for cash dividends. Ensuring the response draws upon relevant academic research within this highly topical area of financial management, critically evaluate the effects of this proposal on the company.(500 words)
(10 marks)

Critically evaluate the benefits and limitations of each of the differing investment appraisal techniques, ensuring the use of relevant academic literature. (1500words) (20 marks)