Evaluate accounting rate of return and net present value, Financial Management

Assignment Help:

Citilink has a business line currently owns and runs 350 sightseeing buses and has a turnover of $10 million per annum. The current system for allocating jobs to drivers is very inefficient. Citilink is considering the implementation of a new computerised tracking system called "DigiLink". This will make the allocation of jobs far more efficient.

You are the financial analyst of the business line. You have been asked to perform some calculations to help the Finance Director to decide whether DigiLink should be implemented. The project is being appraised over 5 years.

The costs and benefits of the new system are set out below.

i. The central tracking system costs $2,100,000 to implement. This amount will be payable in three equal instalments: one immediately, the second in one year's time, and the third in two years' time.

ii. Depreciation on the new system will be provided at $420,000 per annum.

iii. Staff will need to be trained how to use the new system. This will cost $425,000 in the first year.

iv. If DigiLink is implemented, revenues will rise to an estimated $11 million this year, thereafter increasing by 5% per annum (i.e. compounded). Even if DigiLink is not implemented, revenues will increase by an estimated $200,000 per annum, from their current level of $10 million per annum.

v. Despite increased revenues, DigiLink will still make overall savings in terms of vehicle running costs. These cost savings are estimated at 1% of the post DigiLink revenues each year (i.e. the $11 million revenue, rising by 5% thereafter, as referred to in note iv).

vi. 6 new operators will be recruited to manage the DigiLink system. Their salaries will cost the business line $120,000 per annum in the first year, $200,000 in the second year, thereafter increasing by 5% per annum (i.e. compounded).

vii. The business line will have to take out a maintenance contract for the DigiLink system. This will cost $75,000 per annum.

viii. Interest on money borrowed to finance the project will cost $150,000 per annum.

ix. The business line's cost of capital is 10% per annum and the maximum allowable payback period is 2.5 years.

x. Ignore taxation.

(a) Assess the viability of the DigiLink project using payback period, accounting rate of return, net present value, and internal rate of return.

(b) Evaluate appropriate sources of finance for the DigiLink project in terms of suitability and their respective advantages and disadvantages.


Related Discussions:- Evaluate accounting rate of return and net present value

Shoppers stop, how are indian customers visiting shoppers stop

how are indian customers visiting shoppers stop

Discount Pricing, Discount Pricing The T-bills are issued at a discount...

Discount Pricing The T-bills are issued at a discount to face value and hence have no coupon. Commission rates on round lots generally range from $12.50 to $25.00 per $1 mil

Application of concept of tvm, Q. Application of concept of TVM Sometim...

Q. Application of concept of TVM Sometime the financial manager has to deal with the varying situation of the decision making where the concept of TVM needs to be applied in th

Review of financial research report, This assignment is an analysis of a US...

This assignment is an analysis of a US publicly-traded company; its common stock could be a prospective investment.  The report is due in Week 10, in needs to be at least 5 pages,

Informational and financial disclosures, SEC Filings -Informational and fin...

SEC Filings -Informational and financial DISCLOSURES required by SEC in order to comply with many sections of the Securities Act of 1933 and Securities and Exchange Act of1934. A n

Opportunity worth today, Assume that you can receive $25,000 per year forev...

Assume that you can receive $25,000 per year forever and that your cost of money is 7%.  What is this opportunity worth today?

Immunization, In 1952, to provide equilibrium between assets and liab...

In 1952, to provide equilibrium between assets and liabilities of insurance companies, Frank Redington, an English actuary, proposed interest rate immunization te

Ranking conflict net present value & internal rate of return, Explain how t...

Explain how to resolve a "ranking conflict" between the net present value and the internal rate of return.  Why should the conflict be resolved as you explained? Whenever there

Misconceptions of securitization, There are some misconceptions about...

There are some misconceptions about securitization: Poor quality originators end up in securitizing their assets. A bank's best mortgage

Financial audit, To begin this topic, the case of China Sky describes the a...

To begin this topic, the case of China Sky describes the appointment of a special auditor  in the organization that is also a rule in the procedures of Singapore Exchange (SGX). Th

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd