The following information relates to two possible capital projects of which you have to select one to invest in$.$ Both

projects have an Initial capital cost of $$200,000$ and only one can be undertaken. Profit is calculated after deducting

straight line depreciation.

The cost of capital is $16\%,$ relevant discount factors being as follows.

Required

$($a$)$ Calculate:

$($i$)$ The payback period to one decimal place

$($i$)$ The net present value

$($b$)$ Advise the board which project in your opinion should be undertaken, giving reasons for your decision.

$(3$ marks$)$

$($c$)$ The board have looked at your proposal and you have been asked to clarify a number of Issues.

$($i$)$ Explain what is meant by the term 'cost of capital' and why is it important in coming to an Investment

decision.

$($ii$)$ State TWO ways in which risk can be taken into account when making a capital Investment decision.