Juniper GmbH is a German company that is hoping to expand its operations into France. A consultant has prepared forecast cash flows generated by the project (Table 1). The initial investment amounts to 80m, and there is no residual value at the end of the project. Assume that cash flows arise at the end of each year and that taxation has already been taken into account. Juniper GmbH uses various investment appraisal methods and has established specific project acceptance criteria (Table 2). Table 1 Forecast cash inflows from the project Year Cash flows m Profits m 0 (80) (80) 1 15 20 2 26 28 3 38 35 4 40 42 5 12 15 Table 2 Juniper GmbHs investment appraisal methods and project acceptance criteria Investment appraisal Cash flows or profits? Project criteria Accounting rate of return Profits Projects with an accounting rate of return of at least 30% Net present value Cash flows Use a discount factor of 11% Simple payback Cash flows Payback must be within four years Discounted payback Cash flows Payback within four years using 11% discount factor Required: (a) Write a report to management at Juniper, making recommendations as to whether or not to continue with this project, based on each of the investment appraisal methods in Table 2. Include an overall recommendation, based on a summary of the above results. (b) Using the following formula, determine the Internal Rate of Return (IRR) of the proposed investment, and interpret your results. Management requires a rate of return of 18%. (Use a 20% discount factor for one of the NPV calculations: t1 = 0.833; t2 = 0.694; t3 = 0.579; t4 = 0.482; t5 = 0.402)

(c) Critically discuss why there is a difference in the result between simple payback and discounted payback. (d) Critically discuss the reasons that you adopt the NPV appraisal method against the other possible alternative investment appraisal methods. Include in this section a discussion of the critical factors that might affect the outcome of this investment. (e) Explain any non-financial factors that would be relevant to the final decision. Flag any areas where you suggest more information is needed.