The directors of Mylo Ltd are currently considering two mutually exclusive investment projects.

Both projects are concerned with the purchase of new plant. The following data are available for each project:

Project 1 2

£000 £000 Cost (immediate outlay) 100 60 Expected annual operating profit (loss):

Year 1 29 18 2 (1) (2)

3 2 4 Estimated residual value of the plant after 3 years 7 6 The business has an estimated cost of capital of 10 per cent. It uses the straight-line method of depreciation for all non-current (fixed) assets when calculating operating profit. Neither project would increase the working capital of the business. The business has sufficient funds to meet all investment expenditure requirements.

Required:

(a) Calculate for each project:

(1) The net present value.

(2) The approximate internal rate of return.

(3) The payback period.

Exercises CHAPTER 14 Making capit 588 al inve stme nt deci sions

(b) S tate, with reasons, which, if any, of the two investment projects the directors of Mylo Ltd should accept.

AppendixLO1