Question 1:

The directors of Bagle Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new plant. The following data are available for each project:

	Project 1 (000)	Project 2 (000)
Initial cost	(180)	(100)
Estimated annual cash flows:
Year 1	100	70
Year 2	30	30
Year 3	100	25

The company has an estimated cost of capital of 8%.

Required

a) Evaluate the financial viability of the above projects using the following techniques:

1. The payback period
2. the net present value
3. the internal rate of return

b) Explain which measure should be used to make the investment decision in the two project.