(Solved): Section 1: Capital Investment Appraisal 2 3 5 6 8 9 The following scenario relates to Questions 1-6 ...

Section 1: Capital Investment Appraisal 2 3 5 6 8 9 The following scenario relates to Questions 1-6 The directors of Meridian Airways Ltd are currently considering investing in a major project to acquire a fleet of 36 airbus aircraft with a capacity to carry over 340 passengers. This is a 5 year project The initial investment will comprise of three investment sections as follows: 1. €395m for the fleet of new aircraft-at the end of the project they will be sold for £40m. 2. Additionally, they will require logistical operational premises which will cost €100m-at the end of the project a further use will be made of these premises, and the cost transferred to another project. 3. Also they will require 616m of equipment- this is expected to be sold for £1m at the end of the project The director's policy is to depreciate the aircraft and equipment over the life of the project using straight line depreciation. There is no depreciation on the logical operational premises. They have come up with the following projections of revenue and costs: Revenues Running Costs (excluding depreciation) Em 11 12 14 15 18 Em 20 21 Year 1 Year 2 Year 3 Year 4 Year 5 296 331 350 396 386 160 162 170 175 190 23 24 The company, investment criteria when assessing it a project is viable is as follows: 1. The company's cost of capital is 18%. 26 27 2. The company requires an Accounting Rate of Return of >20%, and a payback period within 3-4 years. 3. They require a positive Net Present Value using an 18% (minimum rate of return), before considering Question 8 (2.5 points) The discount factor used to appraise capital investment decisions is a measure of: The current high street interest rate The opportunity cost of capital of all businesses in the same industry The current inflation rate The opportunity cost of capital of the business