Financial and Managerial Accounting for Decision Making

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You are a graduate trainee at Pevensey PLC and as part of your training you have been seconded to the company secretary Mary Fulton. She has requested that you look at a project to help the company purchase a machine. There are 4 potential machines that are being investigated, the details of which are shown below. Only one can be chosen. : Year Net cash flow (ALL FIGS IN ?000) Machine A B C D 0 Capital cost (80) (100) (120) (140) 1 15 35 25 10 2 25 40 35 20 3 25 40 40 50 4 30 15 20 50 5 30 10 10 50 The above figures are estimates of the net cash flow; these are projected revenues minus the machine operating costs for each year. At the end of the period, in year 6, each machine will be sold for ?10,000, except for Machine D, which will be sold for ?50,000. You are required to write a structured business report for Mary Fulton. In the report you will need to appraise this project for her using discounted and non-discounted cash flow techniques. The report should explain which machine you would recommend that the company purchases together with your reasoning. As part of the report she has requested that you include full calculations in an appendix. The report will be used by the Board of Directors, many of whom do not understand finance. To ensure that the Directors fully understand all of the issues Mary has asked that you clearly explain the techniques that you have used, drawing attention to the techniques’ strengths and weaknesses. In recommending a particular machine she has asked that you consider the risks and problems with the figures provided above. The project will be funded by internal funds and the company’s cost of capital data is below (based on the first letter of your surname): Your Company’s Surname Cost of capital (%) A,L,W.I 8 B,M,X,T 9 C,N,Y 10 D,O,Z 11 E,P,K 12 F,Q,V 13 G,R,J 14 H,S,U 15 Please ignore taxation. The total word count is 2,000 words (this excludes the appendices)
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