Question 4

The following information relates to three potential investment projects that are being considered by Scrappit plc. Due to capital rationing, only one of the three projects can be pursued.

	Project A	Project B	Project C
Initial cost	175,000	195,000	190,000
Expected life	5 years	5 years	5 years
Scrap value expected	5,000	8,000	4,000
Expected cash inflows:
End of year 1	75,000	95,000	50,000
2	65,000	65,000	60,000
3	60,000	45,000	65,000
4	55,000	45,000	66,000
5	50,000	45,000	57,000

Additional information:

1. Scrappit plc estimates its cost of capital to be 18%.
2. 35,000 depreciation is charged to Project A each year. iii. 39,000 depreciation is charged to Project B each year. iv. 38,000 depreciation is charged to Project C each year.

Required:

1. Calculate the payback period, accounting rate of return and net present value of each of the potential projects.

2. Explain which of the three potential investment projects should be undertaken. Your explanation should be based on the results of your calculations in part (a).

1. Critically discuss the approaches to investment appraisal used in part (a). As part of your critical evaluation, identify what additional information might be used to improve the approach to investment appraisal.