The finance manager of Wide plc is evaluating two capital investment projects which may assist the company
Question:
The finance manager of Wide plc is evaluating two capital investment projects which may assist the company in achieving its business objectives. Both projects will require an initial investment of £500 000 in plant and machinery but it is not expected that any additional investment in working capital will be needed. The expected cash flows of the two projects are as follows.
The cost of capital of Wide plc is 10 per cent.
(a) For both the Broad and Keeling projects, calculate the return on capital employed, based on the average investment, the net present value and the internal rate of return.
(b) If the Broad and Keeling projects are mutually exclusive, advise Wide plc which project should be undertaken.
(c) Critically discuss the advantages and disadvantages of return on capital employed as an investment appraisal method.
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