Walsh Southern Ltd is considering investing in a new warehouse in the north of the country in order to increase the geographic spread of its operations. The company spent 15,000 in professional fees last year in evaluating the market potential of the planned expansion. It is now considering two possible sites, one of which will be selected. The company has set a payback of four years (non-discounted basis) and uses a cost of capital of 12% when making investment decisions. Financial details of the expected performance of the options are as follows:

Site 1 Site 2

Year 0 Investment 420,000 540,000

Year 1 Profits 75,000 50,000

Year 2 Profits 105,000 100,000

Year 3 Profits 110,000 100,000

Year 4 Profits 70,000 120,000

Year 5 Profits 50,000 110,000

Year 6 Profits 25,000 75,000

Note: Investment relates to the purchase and fit out costs of the new warehouse and is depreciated over 6 years on a straight line basis with no residual value. The annual depreciation expense is included in the calculation of profit for each year.

Required:

1. Calculate the following measures and clearly indicate the measure for each:

(i) Payback

(ii) Discounted payback

(iii) Net Present Value

(iv) Internal Rate of Return

(v) Return on Investment

2. Make a recommendation based on the analysis in (a) above, clearly explaining how you reached that decision.

c) What other factors

-financial and

-non-financial

might you wish to consider in the decision-making process?

d) All capital investment decisions involve risk. Describe one suitable method of how risk can be incorporated into this investment appraisal and explain briefly how the outcome of such analysis can be used to minimise the project risks