Investment Appraisal for Eddystone plcYour company Eddystone plc produces and distributes cement and heavy building materials forconstruction.The company hasrecently developed a new sustainable cement...

Investment Appraisal for Eddystone plcYour company Eddystone plc produces and distributes cement and heavy building materials forconstruction.The company hasrecently developed a new sustainable cement product that is proving very successfuland the business needs a new fleet of 10 special lorries to deliver the product to construction sitesand increase sales. The Operations Director has asked you to evaluate two possible alternatives forthis distribution fleet: Option 1 is for Eddystone to invest in buying the special lorries and to operate thedistribution fleet with driver-operators in-house Option 2 is to outsource the transportation and distribution fleet and distribution operationsto an external contractor, Fleetwood plcEddystone has estimated that the expanded distribution fleet can enable them to win new businesson which they will make net revenues of £1.2m each year before these distribution costs.You obtain the following further information about each option:Option 1: In-houseEach lorry will cost £140,000 and have a 5-year life, after which the disposal value is estimated to be£8,000 per lorry. The annual operating costs of each lorry starting in year 1 will be:Driver & operator £40,000Fuel £20,000Running costs, servicing and repairs £10,000These costs are expected to rise by 4% each year.Option 2: OutsourceFleetwood has offered to provide a full-service fleet of 10 lorries for £500,000 in advance and £90,000per lorry per year for 5 years. This includes providing the lorry itself, a driver-operator and all fuel,running costs, servicing and repairs. Fleetwood’s cost will also increase by 4% per annum. In additionthey will also receive a 2.5% commission on net sales revenues by Eddystone achieved using theselorries. Fleetwood will own these lorries and Eddystone will not benefit from any disposal proceeds.IT ProjectEddystone also has another investment project under consideration to upgrade its aging Head OfficeIT system which manages manufacturing, production, sales and finance. The Operations Director isalso seeking your advice on financing this project. This system is widely viewed within the company asout of date and a constraint on profitability and growth. The business has suffered from severalprolonged systems outages in recent years and lost business as a result. The new system will be morereliable and also have features to improve supply chain efficiency and e-commerce but will only havea 5-year life.A new system will have the following costs:Hardware and software £600,000 payable in advanceDevelopment andimplementation costs£300,000 in year 1£200,000 in year 2Annual running costs £200,000There is no inflation to addThe proposed hardware and software vendor has estimated that annual net savings and efficiencygains will be worth £500,000 per year to Eddystone.Eddystone has credit line with its bank with £1.5m available. It pays a cost of capital of 10% per annum.Note: Taxation can be ignored.Required:(a) Prepare tables showing the net cash flows from each of the two options for thedistribution fleet and the IT project.(15 marks)(b) Calculate the net present value and internal rate of return for each of the two optionsfor the distribution fleet and the IT project.(35 marks)(c) Write a report to the Operations Director outlining which of the two distribution fleetoptions you would recommend to Eddystone and why. Your report should alsocompare and contrast this investment with the alternative investment in the ITsystem.Overall, what advice would you give to Eddystone on its investment priorities?Support your reasoning from a financial management and commercial viewpoint andcritically evaluate the investment appraisal techniques you have used. Includereference to risks, uncertainties and opportunities connected with each investment.(50 marks)Your challenge is to make your points clear and develop short, convincing and factualarguments, making your report clear and readable using proper structure and reasoneddiscussion. Presenting your calculations clearly and precisely will enhance the overall qualityof your report. Your report should not be longer than 2,000 words. The cover page, formulas,tables, reference list and any appendices do not count towards the overall word count. Youshould make your report clear and comprehensive as well as complete to read. You shouldmake your appendices an extension of your report but you are allowed to copy-paste in themain body of your report, relevant edited parts of the data from your appendices, which willnot be counted towards your word count. In this way, your report should contain all yourmain findings, analysis and discussion.The report should include the following sections: Title Page Introduction Analysis and presentation of your findings. Your presentation should be clear andinclude any formulas and summary calculations in the main body of your report. Critical discussion and recommendations to the management of the company andother parties Overall reflection and conclusion References Appendices (include data, information and any detailed calculations)ASSESSMENT CRITERIA:This assignment is worth 30% of the final module mark.Criterion 1: Show clearly and accurately the net cash flows from each of the two options forthe distribution fleet and the IT project.(15 marks)Criterion 2: Show clearly and accurately calculations or the net present value and internalrate of return for each of the two options for the distribution fleet and the IT project.(35 marks)Criterion 3: A report to the Operations Director setting out your financial analysis of the threeinvestment projects and using calculations and supporting evidence, your recommendationson investment priorities to Eddystone.(35 marks)Criterion 4: As well as the financial management considerations, you should also evaluaterelated commercial factors and risks, issues and opportunities connected with this investmentdecision. You can also compare and critically discuss the findings of the NPV and IRR methods