Reference no: EM132547310

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                 Project 2

                                £000                       £000

Cost (immediate outlay)  100                          60

Expected annual operating profit (loss):

Year 1                              29                        18

2                                      (1)                      (2)

3                                          2                         4

Estimated residual value of the plant after 3 years 7 6

The business has an estimated cost of capital of 10 per cent. It uses the straight-line method of depreciation for all non-current (fixed) assets when calculating operating profit. Neither project would increase the working capital of the business. The business has sufficient funds to meet all investment expenditure requirements.

Required:

Question (a) Calculate for each project:

(i) the net present value;

(ii) the approximate internal rate of return;

(iii) the payback period.

Question (b) State, with reasons, which, if any, of the two investment projects the directors of Mylo