Capital Investment Appraisal

Task 1 (Capital Investment Appraisal)
Sohar Chemicals LLC, a chemical manufacturing industry which is based in Liwa has a plan to expand its product range by starting a new unit. The company considers a cost of capital of 8% on all its investments. The company has three investment proposals in consideration.
Proposal A (Ammonia Plant):
Capital Investment: 40000 RO
Proposal B (Acetic Acid Plant):
Capital Investment: 38000 RO
Proposal C (Sulphuric Acid Plant):
Capital Investment: 40000 RO
The expected cashflows of the three projects for a period of 10 years are given in the Table T1.
1. Determine
i) The Pay Back Period (PBP) of the three project proposals
ii) The Average Rate of Return (ARR) of the three project proposals
iii) The Net Present Value (NPV) of the three project proposals
iv) The Profitability Index (PI) of the three project proposals
v) The Internal Rate of Return (IRR) of the three project proposals
(6 marks each x 5 = 30 Marks)
2. Appraise the three proposals based on the above criteria and conclude which of the three proposals is the best for the company. Justify your answer with proper reasons.
Table T1 : Expected cash flows of the three projects
Year Cash Flow of Project A (in RO) Cash Flow of Project B (in RO) Cash Flow of Project C (in RO)
1 8000 10000 8500
2 8440 10470 9290
3 8820 10950 10120
4 9260 11400 10950
5 9630 11860 11760
6 10040 12360 12590
7 10300 12830 13450
8 10640 13360 14260
9 10970 13900 15070
10 11210 14430 15920
(10 marks)
Total 40 Marks
Task 2 (Decision Tree)
A manufacturer of small power tools is faced with foreign competition, which necessitates that they either modify (automate) their existing product or abandon it and market a new product. Regardless of which course of action they follow; they will have the opportunity to drop or raise prices if the company experiences a low initial demand.
Table 2A: Estimates between two alternatives
Alternative Modify product New product
Level of demand Low High Low High
Probability 0.3 0.7 0.5 0.5
Payoff (RO) 40,000 60,000
Table 2B: Estimates when demand for both alternatives are “Low”
Items Modify product
(if low initial demand) New product
(if low initial demand)
Drop price Raise price Drop price Raise price
Level of demand Low High Low High Low High Low High
Probability 0.2 0.8 0.9 0.1 0.2 0.8 1.0 0
Payoff (RO) 20,000 150,000 40,000 200,000 30,000 100,000 50,000 300,000
i) Draw the Decision Tree for the above situation.
(10 marks)
ii) Determine the Expected Monetary Value (EMV) for each alternative and suggest what decision should the manufacturer take.
(30 marks)
Total 40 Marks
Task 3 (Depreciation)
Swift Aerospace purchased a new aircraft engine diagnostics equipment for its maintenance support facility in France. The installed cost of the equipment was RO 50,000 with a depreciable life of 5 years and an estimated 5% salvage. Determine the following
a. Straight Line (SL) depreciation and book value schedule
b. Double Declining Balance (DDB) depreciation and book value schedule.
c. MACRS depreciation and book value schedule.
d. Sinking Fund depreciation and book value schedule, if interest is calculated at 10%.
e. An Excel xy scatter chart to plot the book value curves for all four schedules.
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