CA6060 What are the advantages and disadvantages of using ROCE as an appraisal method?

Overview and Task

CA6060 ASSIGNMENT 2

Q1. An airline wants to buy an aircraft and has narrowed down investment options to two alternative aircraft types: the acquisition of a new A330-300 for £75.67m versus a new Boeing 777-200 for £91m. The aircraft have got similar passenger capacity and each will perform the required services between specified or likely future city pairs. Where there is a difference in payload or cargo capacity, this will be reflected in the revenue forecasts.

TASK:

  1. Complete the investment appraisal cash flow above (NPV, IRR e.t.c)                                          
  1. b) Calculate the payback period for each aircraft    (4 marks)
  2. c) Calculate the profitability index (please include formula and working). What are the advantages and disadvantages oF using this measure as an appraisal tool?     
  1. d) Draw a graph of NPV against discount rate for rates between 0 to 16% (in steps of 2 i.e. 0,2,4 etc.)
  2. Using the above information and any other characteristics of these aircraft, which aircraft would you advise the airline to buy and why if the cost of capital is not expected to go over 10%? You should explain with the help of a sensitivity analysis.
  3. An airport is considering investing in a machine, which, will cost £9000 and will generate positive cash flows over the next four years as follows:
Year T1 T2 T3 T4
Cash flow(£) 1200 2300 3400 4600

You can depreciate the asset using a straight-line method.

  1. Work out the annual accounting profits and then the average ROCE (Return on capital employed) to 1d.p.
  2. What are the advantages and disadvantages of using ROCE as an appraisal method?
  3. No matter which method of appraisal is applied, the users must be aware of its strengths as well as its shortcomings.
  4. Discuss this statement using IRR and payback period as examples.