QUESTION TWO

Sports Co is a large manufacturing company specialising in the manufacture of a wide range of school sports equipment including treadmills, cross trainers and rowing machines. The company has recently signed off on an exciting new deal with Decathlon plc. to sell sports equipment and related accessories for their customers. In order to meet the expected summer rush, Sports Co will need to invest £3,000,000 in new manufacturing premises to cope with the increase in production. Company CEO has located two mutually exclusive potential sites for the new factory, Brazil and China. As the management accountant, you have forecasted the profit and cash flow figures for the two sites and have been advised that the cost of capital is 10%.

Required:

a) Calculate for both projects (showing your workings):

i. The Accounting Rate of Return (ARR)

ii. The Payback Period

iii. The Net Present Value (NPV)

b) CEO is grateful for your calculations but does not understand why you are using differing methods. Explain why accountants use differing methods.

c) Based upon your calculations from part (a), advise CEO which project you would choose and justify your choice.