Mr. Kevin Dates is the owner of an expanding business operating in bakery industry located in Bridgetown, Barbados. Over the last few years business has been great. However, he believes it is time to grow and be more profitable. As such Mr. Dates has decided to invest in a new sophisticated convection oven that would boost production levels by 400% in a more efficient manner. As an astute assistant manager to Mr. Dates have asked you to analyze the following variables to assist in informing the correct decision: 1. Mr. Dates is considering investing in one of two convection ovens - Type ABC and Type XYZ; 2. The initial investment costs of ovens Type ABC and Type XYZ are both $115,000 each; 3. Over a 5 year period directly following the investment, projected revenue attributed to the Type ABC oven is $72,000 a year. While projected expenditure is $42,000 a year for the Type ABC oven; 4. This is not the same for the Type XYZ oven investment, which is projected to only have revenue and expenditure of $300,000 and $130,000 respectively in the fifth year; 5. The situation that surrounds the current oven (old) is that if it sold/traded-in under the Type ABC oven investment arrangement then Mr. Dates will receive a $14,000 profit a year on such a sale over a 5 year period; 6. Conversely with the Type XYZ oven investment the current oven if sold/traded-in will yield a $35,000 profit at the end of year 5; 7. Assume no tax is applied to the business; 8. The cost of capital for each investment is 10%. 2 | P a g e You are required to: i. Using an example, briefly explain to Mr. Dates what is meant by mutually exclusive investments. ii. Compute each investment’s payback period. iii. Compute each investment’s Net Present Value (NPV) iv. Compute each investment’s Internal Rate of Return (IRR). v. Which investment should Mr. Dates accept and why? vi. Based on the above calculations and analysis, what has caused the ranking conflict? vii. List two (2) disadvantages of using the NPV method in evaluating business investment
Mr. Kevin Dates is the owner of an expanding business operating in bakery industry located in
Bridgetown, Barbados. Over the last few years business has been great. However, he believes it
is time to grow and be more profitable. As such Mr. Dates has decided to invest in a new
sophisticated convection oven that would boost production levels by 400% in a more efficient
manner.
As an astute assistant manager to Mr. Dates have asked you to analyze the following variables to
assist in informing the correct decision:
1. Mr. Dates is considering investing in one of two convection ovens - Type ABC and Type XYZ;
2. The initial investment costs of ovens Type ABC and Type XYZ are both $115,000 each;
3. Over a 5 year period directly following the investment, projected revenue attributed to the Type
ABC oven is $72,000 a year. While projected expenditure is $42,000 a year for the Type ABC
oven;
4. This is not the same for the Type XYZ oven investment, which is projected to only have revenue
and expenditure of $300,000 and $130,000 respectively in the fifth year;
5. The situation that surrounds the current oven (old) is that if it sold/traded-in under the Type
ABC oven investment arrangement then Mr. Dates will receive a $14,000 profit a year on such a
sale over a 5 year period;
6. Conversely with the Type XYZ oven investment the current oven if sold/traded-in will yield a
$35,000 profit at the end of year 5;
7. Assume no tax is applied to the business;
8. The cost of capital for each investment is 10%.
2 | P a g e
You are required to:
i. Using an example, briefly explain to Mr. Dates what is meant by mutually exclusive
investments.
ii. Compute each investment’s payback period.
iii. Compute each investment’s
iv. Compute each investment’s
v. Which investment should Mr. Dates accept and why?
vi. Based on the above calculations and analysis, what has caused the ranking conflict?
vii. List two (2) disadvantages of using the NPV method in evaluating business investment
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