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Question 1 continued Company A plans to expand by adding a new production line. Two alternative types of production line are being considered. Forecast cash
Question 1 continued Company A plans to expand by adding a new production line. Two alternative types of production line are being considered. Forecast cash flows will be evaluated using a cost of capital of 10% and are given below. Net cash flow Line A Line B f Year 0 (initial investment) -3,050,000 - 1,940,000 Year 1 700,000 200.000 Year 2 700,000 300,000 Year 3 800,000 600.000 Year 4 900,000 800,000 Year 5 900.000 900.000 Required: (b) Calculate the following and explain the significance of your results for Company A's investment decision: (0) The net present value (NPV) for each project. (i) The internal rate of return (IRR) for the project with the highest NPV. (14 marks) YOUR ANSWER to Question 1(b) (c) Discuss the difference between internal rate of return (IRR) and the average accounting return (AAR) and whether or not you would advise Company A to also calculate AAR. (7 marks)
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