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Really struggling with Investment Appraisal - payback, NPV, IRR?

  • 05-05-2017 6:19pm
    #1
    Lollipop95
    Registered Users, Registered Users 2 Posts: 1,278 ✭✭✭


    Hey everyone, hoping someone can give me a bit of guidance. I've an accounting exam coming up on on few areas, MCQ thankfully. I'm planning on doing break-even analysis which I've perfected and also theory. I then decided to do investment appraisal. Only thing is I've been looking at sample questions completely different to the exam papers and have only now realised this. The exam isn't until a few days time but still freaking out. This is the question that came up last year and to say I'm at a loss at how to calculate the payback period is an understatement. This forum has been a lifesaver in the past. I did try to upload the question as a photo but it wouldn't work so I thought I might chance my arm, type it out and see if anyone could help me make sense of it. I do have my lecturer's notes in but they seem to make it even more complicated :/


    "Burns LTD is considering undertaking a major new capital expenditure. The follow information has been made available to you.

    1. The project will have an estimated useful life of 4 years

    2. Equipment needed for the project is estimated to cost €2,000,000. This equipment is expected to have a residual value of only €60,000 at the end of year 4.

    3. The project will require additional working capital (inventory, etc) of 100,000 for the duration of its life:

    Cash flow for the project are based on the forecast: (it's 4 years, but it wouldn't type out correctly, hence the gaps between the figures)

    Sales Volume (Units) 4300 6400 5200 6000
    Sales Price Per Unit 250 270 285 275
    Variable Cost per Unit
    Direct Material 80 80 85 88
    Labour 50 51 50 52
    Overheads 12 18 17 16


    The cost of the finance for this company is 9%

    You are required to explain the proposal using:

    1. Payback
    2. Net Present Value
    3. Internal Rate of Return"


    It's mainly payback I'm hugely struggling with. I know from my notes there should be a table and the headings is 'Yr' 'Cashflow' and 'Cumulative'. But after that I don't know. Does the Sales Volume figure come into play? If anyone could help me with answering any 3 of these questions and making sense of the question it'd really help


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