Watley’s are looking into the possibility of buying an automatic cutting machine, which would enable the company to reduce its headcount by one; however, the company wants to check that the overall savings will justify the initial capital outlay.
The new equipment will cost £60,000 and will cost £2,000 a year in maintenance costs. There will be an annual saving of £22,000 in labour. The equipment will have a useful life of 4 years, at which point it will have zero value.
Part 1
Using a discount rate of 10%, use the NPV method to recommend whether or not Watley’s should invest in the new automatic cutting machine.
Click here to access a data table showing how to calculate the discount rate.
Part 2
When carrying out capital investment analysis, there are a number of assumptions that have to be made about the future, with respect to the capital investment project itself as well as other wider economic factors.
Inevitably, some of the assumptions may be found to be incorrect over time, which may mean that the attractiveness of the capital investment may increase or decrease.
Critically analyse TWO such assumptions that might apply to the capital investment analysis relating to the purchase of the automatic cutting machine.
Part 3
The NPV is one viable method of carrying out analysis into capital investment decisions, but there are also others available.
Critically compare the NPV method with other available capital investment analysis methods, and suggest how this applies in the context of the above scenario for Watley’s.
This is a mixed style question, with some technical content and some report-style content, with a word count range of 1500 – 2000 words.
Learning Outcomes:
Apply appropriate techniques to analyse and evaluate financial performance
Make financial decisiocixns based on financial information
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