Allerton plc is considering investing in a new capital project and has a choice of three alternatives, only one of which can be implemented. The following data is available (assume that capital outlays occur immediately and net cash flows occur at each year-end):

£m Project 1 Project 2 Project 3 Initial outlay 400,000 460,000 360,000 Project life: 5 years 5 years 4 years Chapter 14 Inves tment apprais al 359

£m Project 1 Project 2 Project 3 Net cash inflows:

Year 1 160,000 200,000 110,000 Year 2 140,000 140,000 120,000 Year 3 130,000 100,000 190,000 Year 4 120,000 100,000 150,000 Year 5 110,000 100,000 –

Residual value 20,000 30,000 16,000 The company’s cost of capital is 7% and the relevant discount factors are shown below:

Year 1 0.935 Year 2 0.873 Year 3 0.816 Year 4 0.763 Year 5 0.713 Project 2 has a higher labour content than the other two projects. Project 1 is powered by fossil fuel whereas projects 2 and 3 use solar power.

(a) Calculate the net present value of each project and evaluate the three alternatives based purely on this method.

(b) Calculate the payback period of each project and evaluate the three alternatives based purely on this method.

(c) Identify three other factors which might influence the management’s decision.