Question 2.

Middle East Ltd. is planning to diversify its operations by exploring two new business opportunities.

Opportunity Toy shop has an expected working life of four years, requires 65000 of initial capital expenditure and a further 5000 of working capital. At the end of year 4 the residual value is forecast to be 8000.

Opportunity Baby-needs shop also has an estimated working life of four years and has an initial cash outflow of 35000 which includes working capital of 1000. At the end of year 4 the residual value is estimated to be 2000.

Estimates for net cash flow for both projects are as follows:

Year	Toy shop	Baby-needs shop
1	8,000	10,000
2	23,000	12,000
3	30,000	15,000
4	25,000	7,000
Year	Present Value Rates at 10%	Present Value Rates at 15%
1	0.9524	0.8696
2	0.9070	0.7561
3	0.8638	0.6575
4	0.8227	0.5718

Required:

Utilising the above information, numerically assess the projects using Payback, Net Present Value using the present value rates at 10%, Internal rate of return using present value rates at 15% and based on your evaluation, make recommendations as to which project should be undertaken?