10,000

Zaharo Investment LLP. Zaharo Investments LLP is a UK-based private equity company, which has hired you to evaluate its investment opportunities and advise its Board of Directors, which will decide on their approval. The Board of Directors has monthly meetings and in the next meeting will consider five projects and has an investment budget of 80,000. The operations manager has given you a list of five investment opportunities, which the business development team has provided. Project Initial Investment Annual Revenue Life of project in years 3 5 Project 1 Project 2 Project 3 Project 4 Project 5 20,000 60,000 30,000 24,000 36,000 4 Annual Fixed costs cash outflows 10,000 20,000 12,000 16,000 4,000 40,000 60,000 36,000 34,000 16,000 10 15 The variable costs, as cash outflows, are 40% of the annual revenues and the cash flows are confined to within the lifetime of each project. Assume that there is no inflation or tax. It is also given that Project 4 and Project 5 are mutually exclusive and the cost of capital 10%. Required: 1) What is the optimal allocation of the 80,000 available funds to these projects and what is the maximum net present value that Zaharo Investments LLP will obtain? (40% of the total mark; 10% calculations and 30% discussion) 2. Discuss the advantages and disadvantages of the main investment appraisal methods and explain which method a company should use and why. (60% of the total mark)