Reference no: EM132970587
The finance director of Kohl plc is preparing budgets for the next financial year and different departments have submitted a number of applications for investment expenditure. He has received a memo from the managing director stating that no more than £2 million will be available for new investment projects at the start of the next financial year.
Details of the applications for funding are as follows.
Year Project 1 Project 2 Project 3 Project 4
0 (680,000) (450,000) (700,000) (550,000)
1 210,000 150,000 180,000 230,000
2 220,000 150,000 180,000 230,000
3 230,000 150,000 280,000 230,000
4 220,000 150,000 280,000 230,000
5 210,000 180,000 280,000 N/A
The capital that is available for investment in new projects is limited to £2m and the cost of capital of Kohl is 15%.
Required:
Problem 1: Critically discuss whether Kohl should evaluate investment projects using a real terms approach or a money terms approach.