# PFF Outcome2

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PFF Outcome2
PFF
Outcome 4 – Project Appraisal

Report: Project Appraisal
To: Management of Matteck plc
Date: 20/01/2015

Introduction
I have been asked to produce a report for management of Matteck plc in which I will evaluate the financial viability of the investment proposal. The company is considering expanding into Asia. This operation would involve the acquisition of a factory, a purchase of several new motor vehicles and a new distribution unit. The following are the estimated costs of the planned investment:

Description Cost
Factory £ 1,100,000
Motor vehicles £ 500,000
Distribution unit £ 900,000
Total £ 2,500,000
The directors have calculated that the expected revenue from the investment over the next five years is as follows:

Year
1
2
3
4
5

£ 500,000
£ 600,000
£ 700,000
£ 750,000
£ 750,000

I have been advised that any projects chosen should have an accounting rate of return at least 15% and company’s cost of capital is 10%. The cost of investment should be recovered within four years.

Assumptions
Taxation and inflation have been ignored.
Relied on the estimated supplied.

Appendix 1
Payback
Year Cash flow Cumulative cash flow £ £
0 (2,500,000) (2,500,000)
1 500,000 (2,000,000)
2 600,000 (1,400,000)
3 700,000 (700,000)
4 750,000 50,000
5 750,000 800,000 800,000

Initial cost £ 2,500,000
Payback time 3 years + (700,000/750,000) x 12 = 11.2 months 3 years and 11.2 months

Accounting Rate of Return (ARR)

ARR = Average annual accounting profit/Average investment.
ARR = 160,000/1,250,000 = 12.8%

Total revenue 3,300,000
Total costs 2,500,000
Total profits 800,000
Average profits 160,000
Average investment 1,250,000

ARR 1
Appendix 2
IRR
RR = R1 + NPV1 (R2 – R1)

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