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Business Corporate Finance
The directors of Mylo Ltd are currently considering two mutually
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 cost of capital 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 net present value
(ii) The approximate internal rate of return
(iii) The profitability index
(iv) The payback period
(b) 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.
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