Investment Appraisal
Task: Beauts Ltd -Part 1
Beauts Ltd is a company which manufactures cosmetics which it sells on to the main high street retailers. Its plastic packaging has attracted negative publicity recently due to the environmental issues associated with it. To help its sustainability credentials, the company is currently considering expanding its operation and producing a new product, a lipstick in a bio-degradable container called "Eco-Tint".
The owners of the business want you to evaluate the "Eco-Tint" against an alternative project, the production of a blusher in a bio-degradable container. This alternative product is called "Eco-Blush". The two projects are mutually exclusive and only one of them will be undertaken by the business.
Eco Tint
To produce the "Eco Tint" the company needs to invest in some new machinery. The new machinery is expected to cost £1,000,000. Full payment for the machinery needs to be made on delivery/installation. At the end of the 5-year period the machinery will be sold back to the supplier for £50,000.
|
Year
|
Estimated cash flow
|
|
1
|
300,000
|
|
2
|
320,000
|
|
3
|
350,000
|
|
4
|
320,000
|
|
5
|
250,000
|
Eco Blush
To produce the "Eco Blush" the company needs to invest in some new, different, machinery. The new machinery is expected to cost £800,000. Full payment for the machinery needs to be made on delivery/installation. At the end of the 5-year period the machinery will be sold back to the supplier for £20,000.
|
Year
|
Estimated cash flow
|
|
1
|
200,000
|
|
2
|
200,000
|
|
3
|
220,000
|
|
4
|
300,000
|
|
5
|
400,000
|
Required:
1. Calculate the Payback Period for both investment projects
2. What would be your recommendation to the business about the investment?
Part 2: Beauts Ltd (NPV)
Having heard about the concept of time value of money, the owners feel uneasy about the outcomes of the investment appraisal method applied previously and so the owners of the business want you to re-evaluate the "Eco Tint" against the alternative project "Eco Blush".
Required:
3. Calculate the Net Present Value (NPV) for both projects. A template is provided below to help you.
4. What would be your recommendation to the business about the investment based on the outcomes of NPV?
5. What you observe in comparison to the outcomes of the previous evaluation using payback period?
6. Outline the key advantages and disadvantages of the methods used (PP, NPV).