INVESTMENT APPRAISAL QUESTIONS

Question $1$

Zuze Ltd$.$ is reviewing investment proposals that have been submitted by divisional managers. The investment funds of the company are limited to $$100,000$ in the current year, details of four possible investments, none of which can be delayed, are given below.

Project Investment Required NPV at $20\%$

$ $

A $100,00048,000$

B $20,00016,000$

C $30,00018,000$

D $45,00021,000$

Required:

$($a$)$ Briefly discuss what capital rationing means, include definition, causes and basic types. $(5$ marks$)$

$($b$)$ How should Zuze Ltd$.$ proceed if the projects are divisible and wants to maximise its return? $(10$ marks$)$

$($c$)$ How should Zuze Ltd$.$ proceed if the projects are non$-$divisible and wants to maximise its return? $(10$ marks$)$

$[$Total $25$ marks$]$

Question $2$:

Stanley Ltd is evaluating the investment in two new projects X and Y which would generate the following expected net cash flows:

Project X Project Y

Year $1190,000180,000$

Year $2310,000270,000$

Year $3280,000300,000$

Year $4240,000285,000$

Year $5220,000270,000$

Details of the initial investment for the two projects X and Y are: N$$850,000$ N$$1,000,000$ with life of $5$ years each.

Residual value for X is N$$60,000$ and for Y is N$$110,000$

The company has a cost of capital of $12\%$ per annum.

Required:

$($a$)$ Assume that each Project will sell for its residual value at the end of five years evaluate each Project using each of the following methods:

$($i$)$ Accounting Rate of Return $($using average capital invested$)$

$($ii$)$ Payback

$($iii$)$ Net present value

$($iv$)$ Cost $$ Benefit Ratio $($Profitability Index$).(17$ marks$)$

$($b$)$ Based upon your calculation above in $($a$),$ advise management which Project should be picked. Give reasons. $(2$ marks$)$

$($c$)$ What are the advantages of Payback and NPV as methods of investment appraisal techniques? $(6$ marks$)$