9 Investment Appraisal Techniques—Mutually Exclusive Options. Clinical Diagnostics, a medical services company, wishes to invest in new medical diagnostic technology. Management is considering the following two systems which it is considered will meet the company’s requirements.

System 1

£m System 2

£m Initial outlay 1.60 1.00 Net Cash Flows Year 1 0.30 0.30 2 0.40 0.30 3 0.50 0.30 4 0.60 0.30 5 0.70 0.30 As the company’s financial manager you have been asked to:

(a) Determine the payback period, the net present value and the internal rate of return for each system.

(b) Present a summary of your findings for presentation to management.

(c) Indicate which system you would recommend, giving your reasons.

(d) Discuss, briefly, any non-financial factors which the management of Clinical Diagnostics should consider in assessing this investment decision.

The company’s cost of capital is estimated at 13 per cent and both systems are considered to be of equal risk.