1. Assume you are the new financial manager of the bed mattress firm, Fairy Tale Lullaby Ltd. The firm has always used payback period and accounting rate of return to appraise new investments. With your trusty copy of ‘Corporate Finance’ to hand, you believe that other methods may be more appropriate for the firm. Write a report to the owners of Fairy Tale Lullaby Ltd reviewing the different methods that can be used in investment appraisal together with their strengths and weaknesses. Comment on any practical issues that Fairy Tale Lullaby may face in implementing these methods. (50 marks)
2. A solar panel production firm Soleil SA, is considering an investment in new solar production technology. The new investment would require initial funding of €4 million today and further expenditure on manufacture of €1 million in each of the years 6 and 7.
The net cash inflow for the years 1 to 4 is €2.34 million per year. Some equipment could be sold at the end of year 5 when the production ends and together with the cash flows from operation would produce a net cash flow of €4.85 million. Evaluate the investment using four investment appraisal criteria. The required rate of return of Soleil SA is 12 per cent and Soleil has been known to use a payback period of 2 years in the past. However, the firm’s managers believe that this payback period may be too short. (50 marks)