4 Mr Cowdrey runs a manufacturing business. He is considering whether to accept one of two mutually exclusive investment projects and, if so, which one to accept. Each project involves an immediate cash outlay of

£100,000. Mr Cowdrey estimates that the net cash inflows from each project will be as follows:

Mr Cowdrey does not expect capital or any other resource to be in short supply during the next three years.
Required

(a) Prepare a graph to show the functional relationship between net present value and the discount rate for the two projects (label the vertical axis ‘net present value’ and the horizontal axis ‘discount rate’).

(b) Use the graph to estimate the internal rate of return of each project.

(c) On the basis of the information given, advise Mr Cowdrey which project to accept if his cost of capital is (i) 6 per cent; (ii) 12 per cent.

(d) Describe briefly any additional information you think would be useful to Mr Cowdrey in choosing between the two projects.

(e) Discuss the relative merits of net present value and internal rate of return as methods of investment appraisal.
Ignore taxation.

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Net cash inflow at end of: Project A Project B () () Year 1 60,000 10,000 Year 2 40,000 20,000 Year 3 30,000 110,000