The Senior management at Aisha Plc have identified that there is a strategic need for a project in Manchester or in London. The Manchester project is expected to have a scrap value of £10,000 and the London project is expected to have a scrap value of £40,000. The Senior management of Aisha Plc have to make a choice between the two projects. They are unsure as to which of the two models they should invest in. The company’s cost of capital is 9%.
They have given you the following cash flows of the two projects.
Cash outflows £
Manchester 150,000
London 180,000
Cash inflows £
Year Manchester London
1 10,000 95,000
2 50,000 25,000
3 50,000 20,000
4 80,000 50,000
QUESTION 1(a) :
They want you to appraise the two prospective projects using the following investment appraisal techniques:
(i) Payback
(ii) Accounting rate of Return
(iii) Net Present Value
(iv) Internal Rate of Return
Funds are only available for only one model.
Write a report to the senior management of the company explaining how each of the techniques works. Your report should include at least two advantages and two disadvantages of each technique.
Explain briefly which project you would recommend to senior management of Aisha Plc under each technique and state your reason why you would recommend that machine.
