Siegfried plc is a coach operator, the Board of which is considering the acquisition of a new station. The initial outlay would be 1.7m, and the period of operation is conservatively estimated at ten years. In real terms, the net cash flows (revenues less expenses) are estimated at 0.4m for the first five years of the project, and 0.5m for the final five years. The company operates a target rate of 16% for accounting rate of return, and a payback criterion of four years.

Required:

(a) Explain and discuss the accounting rate of return and payback period criteria as methods of project appraisal;

(45%)

(b) Appraise the viability of the project using the net present value criterion, assuming that inflation will be negligible for the foreseeable future;

(15%)

(c) Appraise the viability of the project using the net present value criterion, assuming that inflation currently stands at 2.6%, and is not expected to change significantly over the next five years.