The Directors of Lolipop 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 A Project B

$'m

Cost( immediate outlay ) 100 60

Expected annual net profit (loss)

Year 1 29 18

Year 2 (1) (2)

Year 3 2 4

Estimated residual value of the plant 7 6

The minimum expected return by the shareholders is 10%. the Industrial average cost of capital is 12%. The company uses the straight line method of depreciation for all non-current (fixed )assets when calculating profit. Neither project would increase the working capital of the business. The business has sufficient funds to meet all capital expenditure requirements . The company expects to pay a total constant dividend of $ million per year for the next three ( 3) years.

Required

a) Calculate for each project

1. Accounting Rate of Return

2. The PayBack period

3. The NPV

4. The approximate IRR

Advise the directors which project should be undertaken

b) State which method of investment appraisal in (a) above you consider to b e most appropriate for calculating investment projects and why

c) Explain three (3) factors that may affect the dividend policy of Lolipop Ltd