2. Carling Ltd is a manufacturer of industrial drills. It has IM earmarked for capital investment in the current year and the Board has identified two projects (each requiring an initial outlay of IM) from which it will choose. The company's capital structure at present is: Ordinary shares 5% Preference shares 10% Debentures Total capital The two rival projects have anticipated costs and income flows as follows: Project 1 Project 2 000 '000 Cost 1000 1000 100 Income - Year 1 Year 2 Year 3 Year 4 Year 5 350 150 Year 6 200 200 Total income 1750 1800 (b) You are asked to evaluate the two projects using: (i) the payback method (by plotting the data) (ii) the DCF/NPV technique (assume a 12% cost of capital). (c) A Board member asks whether risk and uncertainty should be taken into account. You are asked to write a brief report outlining the arguments for and against the suggestion