Investment Alternatives and Capital Budgeting

The expected cash flows of three investment projects Project Alpha, Beta, Charlie and

Delta for the next ten years are provided in the table below; year 0 as an initial period and

year 1 to year 10.

Period

Project

Alpha ($)

Project

Beta ($)

Project

Charlie ($)

Project

Delta ($)

Year 0

(5,000)

(5,000)

(5,000)

(5,000)

Year 1

900

700

2,000

500

Year 2

900

800

2,000

0

Year 3

900

900

2,000

3,000

Year 4

900

1,000

1,000

0

Year 5

900

1,100

0

500

Year 6

900

1,200

0

2,000

Year 7

900

1,300

0

0

Year 8

900

1,400

0

1,000

Year 9

900

1,500

0

0

Year 10

900

1,600

0

0

As a professional accountant of Sage Accounting Ltd., you are required to provide critical

advice to your client on the best investment decision whether to invest in the project of

Alpha, Beta, Charlie or Delta

In order to maximize the investment return to your client, you are required to employ seven

main investment appraisal techniques such as the techniques of PBP (Payback Period),

Discounted PBP, ROCE (Return on Capital Employed), NPV (Net Present Value), IRR

(Internal Rate of Return), Modified IRR and a stability test.

With the prevailing interest rate in the lending and borrowing markets, as a professional

accountant you consider that the required rate of return at present is 12 per cent.

Required tasks

1)

Calculate the Pay Back Period (PBP) and Discounted PBP of each project.

(5 marks)

1

2)

Show the ranking of the projects by employing PBP and Discounted PBP criteria, and

advise your client on the best investment action.

(5 marks)

3)

Calculate the ROCE of each project.

(5 marks)

4)

Show the ranking of the projects by using ROCE criteria, and advise your client on

the best investment action.

(5 marks)

5)

Calculate the NPV of each project.

(5 marks)

6)

Show the ranking of the projects by utilising NVP criteria, and advise your client on

the best investment action.