Cowdrey runs a manufacturing business

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Reference no: EM131128870

Mr Cowdrey runs a manufacturing business. He is considering whether to accept one of two mutually exclu- sive investment projects and, if so, which one to accept. Each project involves an immediate cash outlay of

£100,000. Mr Cowdrey estimates that the net cash inflows from each project will be as follows:

Net cash inflow ^at^end^of:	Project A ^(£)	Project B ^(£)
Year 1	60,000	10,000
^Y^ear²	^40,000	^20,000
^Y^ear³	^30,000	¹^10,000

Mr Cowdrey does not expect capital or any other resource to be in short supply during the next three years.

Required

(a) Prepare a graph to show the functional relationship between net present value and the discount rate for the two projects (label the vertical axis 'net present value' and the horizontal axis 'discount rate').

⁽^b)^Use^the^graph^to^estimate^the^internal^rate^of^r^eturn^of^each^p^r^oject.

^(c)^On^the^basis^of^the^information^given,^advise^Mr^Cowd^r^ey^which^p^r^oject^to^accept^if^his^cost^of^capital^is

⁽ⁱ⁾⁶^per^cent;⁽ⁱⁱ⁾¹²^per^cent.

⁽^d⁾^Describe^briefly^any^additional^information^you^think^would^be^useful^to^Mr^Cowd^r^eyⁱⁿ^{choosing between}^the^two^p^r^ojects.

^(e)^Discus^s^th^e^r^elativ^e^merit^s^o^f^ne^t^p^r^esen^t^valu^e^an^d^interna^l^rat^e^o^f^r^eturⁿ^a^s^method^s^o^f^{investment appraisal.}

Reference no: EM131128870

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