Assume that the company you chose in part a) has been researching the prospects for a range of new investment opportunities. The cash flow details of two promising projects (which are mutually exclusive) are given below: Year Projected Cash Flows (£m) A B 0 -85 -90 1 10 40 2 20 35 3 25 7 4 65 40 Assume that the company’s cost of capital is currently at 10.25 per cent. Assume that all cash flows arise at year ends and straight-line depreciation is used over the life of the project with zero scrap value. Ignore taxation and inflation. 1. Calculate the Payback Period (PBP), Accounting Rate of Return (ARR) and the Net Present Value (NPV) of the project. Evaluate the results of these calculations and recommend with reasons which project should be adopted.
Assume that the company you chose in part a) has been researching the prospects for a range of new investment
opportunities. The cash flow details of two promising projects (which are mutually exclusive) are given below:
Year Projected Cash Flows (£m)
A B
0 -85 -90
1 10 40
2 20 35
3 25 7
4 65 40
Assume that the company’s cost of capital is currently at 10.25 per cent.
Assume that all cash flows arise at year ends and straight-line depreciation is used over the life of the project with zero
scrap value. Ignore
1. Calculate the Payback Period (PBP), Accounting
the project. Evaluate the results of these calculations and recommend with reasons which project should be
adopted.
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