Section C - Answer one question Question 5 - Answer both parts (A) and (B) Part A French state-owned lectricit de France SA (EDF), is considering two alternative energy investment projects: Project 1: The first project is a 500 MW coal-fired power plant in the south-eastern Chinese province of Jiangxi. This project is expected to last 6 years, requires an initial investment of 500m and generate positive cash flows of 120m in years 1 to 6. Project 2: The second project is a 350 MW wind farm in the state of Bahia, Brazil. This project is expected to require an initial investment of 625m and generate positive cash flows in years 2 to 5 of 150m per annum and positive cash flows of 75m per annum in years 6 to 8. Based on his analysis of similar projects, EDF's Chief Financial Officer (CFO) estimates that the appropriate discount rate for the Chinese project is 9% and 5% for the Brazilian project. Because of the shorter payback period using the Payback Method, the CFO favours the Chinese project. Option A: Outsource the technical part of the project so that the company will incur additional annual running costs of 2.0m over the life of the project i.e. years 1 to 8 Option B: EDF can recruit and train an in-house project team to undertake this work. This will require an initial cost of 5m and an on-going annual cost of 500,000 in years 1 to 8. Assume that the appropriate discount rate for both Option A and Option B is 5%. Required: (a) Calculate the Net Present Value (NPV) of the two projects. Explain your workings. (30 Marks) (b) Discuss and evaluate the relative merits of NPV and the Payback Method as investment appraisal techniques. (20 Marks) (c) Based on your analysis above, make a reasoned recommendation as to which project EDF should undertake. (20 Marks) Required: (a) Calculate the NPV for each option and recommend which of the two options EDF should select. Explain your workings. (15 Marks) (b) Explain how this additional work will affect the NPV of the Brazilian project calculated in PART A. Show any workings. (10 Marks) (c) State whether you would change your recommendation in PART A based on this further analysis. Explain your reasons. (5 Marks) Part B On further analysis, the company finds that the renewable energy project in Brazil has some technical issues which will result in some additional costs. EDF is considering two ways to deal with this Total 100 Marks