Part 2 – Greenfingers, Plc. Investment Programme
For Part 2, you will evaluate three investment options and propose how an investment programme might be financed for Greenfingers, Plc.
Write a business report for Greenfingers’ Directors explaining whether the company should undertake the project or look for other opportunities. The business report should incorporate the following information:
Include an evaluation of the three investment options using the net present value (NPV) technique, assuming the cost of capital to be 6%. (You are required to show all of your calculations.). Identify which option you would recommend and provide a detailed explanation supporting your recommendation.
Based on your recommendation, calculate the approximate internal rate of return (IRR). (You are required to show all calculations).
Interpret your results including:
Include theoretical arguments for the choice of net present values and the best method for investment appraisal.
Explain the continued popularity among decision-makers of non-discounting methods of investment appraisal.
Identify what other factors should be considered before an investment decision is made.
If funds are limited to £2,500,000 and the projects are divisible, (i.e. it is possible to undertake a fraction of a total project), calculate the optimal investment policy and the resulting total NPV from your investment policy.
Provide your recommendations to the Greenfingers, Plc Directors how the proposed investment programme might be financed by identifying the main sources of available financing. Additionally, include the main advantages and disadvantages of each finance source.
Greenfingers, Plc. Scenario
Greenfingers Plc., who produce a variety of high-quality outdoor rattan furniture and associated items, is considering whether or not to invest to expand the business. The directors have identified three main options for a four-year plan:
Expand its flourishing retail outlet to include all products.
Launch an eCommerce site to generate internet sales.
Produce greenhouses and conservatories
These three options would require an initial expenditure of (A) £650,000, (B) £1,100,000, or (C)
£1,800,000.
The most recent estimates on year-end cash flows is as follows:
Year 1
Year 2
Year 3
Year 4
£’000
£’000
£’000
£’000
(A)
300
400
450
500
(B)
500
550
700
950
(C)
500
800
1050
1200
Assume corporation tax is 25% and capital allowances are 20% on a straight-line basis. All of these cash flows occur in the year that they arise.
