The directors of Mylo Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned

Question:

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 (£) _____________ 2 (£)
Cost (immediate outlay) ............................ 100,000 .............. 60,000
Expected annual net profit (loss)
Year 1 ................................................. 29,000 .............. 18,000
2 ........................................................ (1,000) .............. (2,000)
3 ........................................................ 2,000 ............... 4,000
Estimated residual value ............................ 7,000 ................ 6,000
The company has an estimated of 10 per cent and employs the straight-line method of depreciation for all fixed assets when calculating net profit. Neither project would increase the working capital of the company. The company has sufficient funds to meet all capital expenditure requirements.
Required
(a) Calculate for each project:
(i) The
(ii) The approximate The profitability index
(iv) The State which, if any, of the two investment projects the directors of Mylo Ltd should accept, and why.
(c) State, in general terms, which method of investment appraisal you consider to be most appropriate for evaluating investment projects and why.
Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...