ABC Ltd has provided the following figures for two investment projects, only one of which may be chosen.

Project X Project Y

Initial outlay 100,000 100,000

Profit for year 1 25,000 15,000

2 30,000 35,000

3 35,000 40,000

4 20,000 10,000

Estimated resale value at end of year 4 30,000 15,000

Profit is calculated after deducting straight line depreciation. The business has a cost of capital of 3%.

Required

a) Calculate for each project

i. Payback

ii. Return on Capital Employed

iii. Net present value (NPV) (20 marks)

b) Critically discuss the merits and limitations of payback and NPV (18 marks)

(Your answer has to be presented in an essay format)

c) Explain which project you would recommend for acceptance (4 marks)

d) Discuss when you would use Weighed Average Cost of Capital and the problems associated with the practical and calculating it. (8 Marks)

TOTAL (50 Marks)