ACC311 Strategic and Sustainable Accounting

Question:

Capital Investment Analysis

The Breville Group is considering establishing a new research and development lab that will focus on the development of smart appliances. Key points in regards to the lab are as follows:

· Establishing the lab will cost $18 million. This cost will be depreciated on the straight-line basis over the 8 year life of the lab.
· In first year of establishing the lab, the cash operating costs of the lab will be $3.0 million. These costs are expected to increase by 8% p.a. over the life of the lab.
· In the first year of establishing the lab, the lab is expected to increase the firm’s revenues by $12.0 million. These revenues will increase by 4% p.a. over the life of the lab. On average, cost of sales is 65% of sales revenue.
· The firm’s tax rate is 30%.
· The firm requires a 12% required rate of return on all potential investments.

Required:

1. In relation to the above proposal, calculate the:
a. Annual after tax cash flows and annual after tax profit
b. Payback period
c. Net present value and internal rate of return
d. Accounting rate of return
2. Provide an overview of the key environmental and social factors that the Breville Group should consider in evaluating the proposal
3. Based on an assessment of financial considerations and other factors, provide a recommendation as to whether the Breville Group should go ahead with the proposal. How sensitive are your recommendations to changes in projections of the financial impact of the new capital investment?
Ensure that your answers for the above are discussed and supported by relevant calculations/workings