Problem: Investments
1. Critically evaluate with the help of an example why the payback method for assessing an investment may be less appropriate than any two other methods. Describe the methods and list their strengths and weaknesses, paying attention to any practical problems that may arise in implementing the methods.
2. A coffee roastery, DarkLight plc, is considering an investment in a new machine. The new investment would require initial funding of £5 million today and environmental clean-up costs of £2m in year 6. The net cash inflow for the years 1 to 4 is £3.34 million per year. Some equipment could be sold at the end of year 5 when the production ends, which together with the cash flows from operation, would produce a net cash flow of £3.85 million. The required rate of return of DarkLight plc is 12 percent and they have used a payback period of two years in the past. Evaluate the investment using any three investment appraisal criteria, plus the discounted payback method. Check if the two-year payback period is appropriate.
3. You need to purchase £400,000 worth of equipment with a down payment of 20 percent. You decide to pay off the loan over 6 years, using monthly payments starting one month from now. The APR of the loan is 9.6 percent. How much are the monthly payments?