Roadwheelers Ltd were considering buying an additional lorry but the company had not yet decided which particular lorry to purchase. The lorries had broadly similar technical specifications and each was expected to have a working life of five years. The following information was available on the lorries being considered: 1 Lorries BN FX VR Roadhog Sprinter Rocket Purchase price £40,000 £45,000 £50,000 Estimated scrap value after five years £8,000 £9,000 £14,000 Fixed costs other than depreciation ie £ £ Year 1 2,000 1,800 1,500 Year 2 2,000 1,800 1,500 Year 3 2,200 1,800 1,400 Year 4 2,400 2,000 1,400 Year 5 2,400 2,200 1,400 Variable costs per road mile 6p 8p 7p 2 The company charges 25p per mile for all journeys irrespective of the length of journey and the expected annual mileages over the five-year period are: Miles Year 1 50,000 Year 2 60,000 Year 3 80,000 Year 4 80,000 Year 5 80,000 3 The company’s cost of capital is 10% per annum. 4 It should be assumed that all operating costs are paid and revenues received at the end of year. 5 Present value of £1 at interest rate of 10% per annum: Year 1 £0.909 Year 2 £0.826 Year 3 £0.751 Year 4 £0.683 Year 5 £0.621 Required:

(a) (i) Appropriate computations using the net present value method for each of the lorries under consideration. (ii) A report to the directors of Roadwheelers Ltd advising them as to which specific lorry should be purchased.

(b) A brief outline of the problems encountered in evaluating capital projects. (AQA (Associated Examining Board): GCE A-level)