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lONDON SCHOOL OF COMMERCE | ASSIGNMENT | ACCOUNTING AND DECISION MAKING TECHNIQUES | |
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12/17/2009 |
You are required to provide an evaluation of two proposed projects, both with five year expected lives and identical initial outlays of £110,000. Both projects involve additions to AP Ltd.’s highly successful product range and as a result, the cost of capital on both projects has been set at 12%. The expected cash flows from each project are shown below.
In evaluating the projects please respond to the following questions:
(A) Why is the investment appraisal process so important?
(B) What is the payback period of each project? If AP Ltd imposes a 3 year maximum payback period which of these projects should be accepted?
(C) What are the criticisms of the payback period?
(D) Determine the NPV for each of these projects? Should they be accepted – explain why?
(E) Describe the logic behind the NPV approach.
(F) What would happen to the NPV if: (1) The cost of capital increased? (2) The cost of capital decreased?
(G) Determine the IRR for each project. Should they be accepted?
(H) How does a change in the cost of capital affect the project’s IRR?
(I) Why is the NPV method often regarded to be superior to the IRR method?
[A] Why is the investment appraisal process so important?
Ans. Finance is the life blood of business. Business needs finance from its cradle to grave, so it is very important that where are you going to do investment, that decision will be good for the business or not and for that purpose investment appraisal is very necessary. Investment appraisal refers to an evaluation of attractiveness of
|
12/17/2009 |
You are required to provide an evaluation of two proposed projects, both with five year expected lives and identical initial outlays of £110,000. Both projects involve additions to AP Ltd.’s highly successful product range and as a result, the cost of capital on both projects has been set at 12%. The expected cash flows from each project are shown below.
In evaluating the projects please respond to the following questions:
(A) Why is the investment appraisal process so important?
(B) What is the payback period of each project? If AP Ltd imposes a 3 year maximum payback period which of these projects should be accepted?
(C) What are the criticisms of the payback period?
(D) Determine the NPV for each of these projects? Should they be accepted – explain why?
(E) Describe the logic behind the NPV approach.
(F) What would happen to the NPV if: (1) The cost of capital increased? (2) The cost of capital decreased?
(G) Determine the IRR for each project. Should they be accepted?
(H) How does a change in the cost of capital affect the project’s IRR?
(I) Why is the NPV method often regarded to be superior to the IRR method?
[A] Why is the investment appraisal process so important?
Ans. Finance is the life blood of business. Business needs finance from its cradle to grave, so it is very important that where are you going to do investment, that decision will be good for the business or not and for that purpose investment appraisal is very necessary. Investment appraisal refers to an evaluation of attractiveness of
References: * FUNDAMENTALS OF FINANCE MANAGEMENT BY JAMES C. VAN HORNE AND M. WACHOWICZ, JR. (13TH EDITION) * FINANCE AND ACCOUNTING FOR NON-FINANCIAL MANAGERS BY WILLIAM G. DROMS, 2003 (pg.187) ………………………………….THANK YOU………………………………………………………………..