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A company has budgeted for a capital investment of

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A company has budgeted for a capital investment of

 

(b) A company has budgeted for a capital investment of £150,000. Only one project can be chosen for investment and the company must decide between three different investment proposals. The following information is provided Project A £150000 4 years Project C £150000 3 years Project B Capital expenditure £150000 Expected life Scrap value expected 5 years £8000 £10000 £15000 Cash flow – yr 1 Cash flow – yr 2 Cash flow – yr 3 Cash flow – yr 4 Cash flow – yr 5 52000 52000 52000 48000 42000 42000 42000 42000 42000 62000 62000 62000 Notes 1. Capital expenditure for all three projects would be incurred immediately 2. Taxation is to be ignored 3. The company estimates its cost of capital to be 15%

(Table QA2) You are required to calculate for each project,

(i)the net present value

(ii) the internal rate of return

(iii) the payback period

(12 marks) (c) State the relative merits of the methods of investment appraisal in b(i-ii) (3 marks) (d) Which project, on balance, you would recommend for acceptance? Give your reasons (2 marks) Note: Present value of £1 table is given at the end of the paper

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15% 0.870 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 0.215 0.187 0.163 0.141 0.123 0.107 0.093 0.081 0.070

 

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