Investment Appraisal (35 Marks) Premium Pills Ltd is a chain of pharmacy stores which sell medicines and health & beauty products. They are looking for ways to improve their profits and commissioned research costing 50,000, which came up with two possible investments. The company's cost of capital is 14% per year and both projects would last for three years. Further data about these two projects is as follows. Project A - New tills The stores have old manual tills which mean it takes a long time for the till operator to serve each customer. Long queues form while customers are waiting to pay, and some customers put down their baskets and walk out as they don't want to wait. This project would buy new tills for all the stores at a cost of 1million in total. The tills would last for 3 years and have no residual value. These tills would be self-checkout tills. As they don't require a till operator, staff salaries of 400,000 per year would be saved. There are also increased sales as customers can pay more easily, have a better experience and don't leave the store without buying. The increased profit from extra sales is another 300,000 per year. However, there would be one-off redundancy costs during year 1 of 300,000. Project B - phone payment This is a proje to launch a new way for customers to pay with a smart phone instead of having to use cash or credit cards. Initial set-up costs (including building the new IT technology into tills and staff training) would be 1 million and there would be no residual value. As more and more people start to use the new technology, sales will be quicker and easier, and more people will come to the store. It is believed that profits from new sales will continue to grow each year. In year 1 they will be 400,000, in year 2 600,000 and in year 3 800,000. There would be a support fee payable to the IT service provider of 50,000 each year, and staff salary costs of 50,000 each year to manage the new system. Required a) Calculate both the Payback and the Net Present Value (NPV) of each of the two projects. Using only these calculations, comment on the financial viability of each project, and which one would be preferable. (20 marks) b) Advise the management of the company of one other factor that should be considered before deciding whether Project A and/or Project B should go ahead. (2 marks) Discuss the advantages and disadvantages of "Payback" and "Net Present Value (NPV)" as techniques for evaluating investment projects. (8 marks) What is the difference between cash and profit? (5 marks) Total : 35 marks