A company which can borrow and lend money freely at 10 per cent p.a. is considering undertaking one of two investments. Information relating to these investments is given below:

Project A Β
Capital outlay £3,000 £2,000 Net cash flow year 1 500 200 2 700 300 3 1,000 500 4 1,100 800 5 900 900 6 100 900 Required:

(a) Calculate the payback period for each project.

(b) Calculate the net present value for each project.

(c) Advise the company which project it should undertake, stating your reasons and entering any caveats you consider necessary.
Do you consider the external rate of interest relevant to the company's decision-making process? If not, what alternative(s) would you suggest and why?
Present value table:

Year 6 7 8 9 10 1 0.94 0.94 0.93 0.92 0.91 2 0.89 0.87 0.86 0.84 0.83 3 0.84 0.82 0.79 0.77 0.75 4 0.79 0.76 0.74 0.71 0.68 5 0.75 0.71 0.68 0.65 0.62 6 0.70 0.67 0.63 0.60 0.57 7 0.67 0.62 0.58 0.55 0.51 8 0.63 0.58 0.54 0.50 0.47 9 0.59 0.54 0.50 0.46 0.42 10 0.56 0.51 0.46 0.42 0.39

Transcribed Image Text:

Project Capital A B outlay 3,000 2,000 Net cash flow year 1 500 200 2 700 300 3456 1,000 500 1,100 800 900 900 100 900