The directors of Mylo 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 1 Project 2

000 000

Cost (immediate outlay) 100 60

Expected annual operating profit (loss):

Year 1 29 18

2 (1) (2)

3 2 4

Estimated residual value of the plant after 3 years 7 6

The business has an estimated cost of capital of 10 per cent. It uses the straight-line

method of depreciation for all non-current (fixed) assets when calculating operating profit.

Neither project would increase the working capital of the business. The business has sufficient funds to meet all investment expenditure requirements.