Reference no: EM133070527
Background Information
ABC public limited company is considering four projects to invest in, projects A, B, C and D. All the projects will require an initial investment of £200,000. The firm believes its weighted average cost of capital (WACC) is 14%. The finance department has produced the data in Table 2.1 as project outcomes, using four project assessment methods: accounting rate of return, payback period, net present value (NPV) and internal rate of return (IRR). The company acceptance level for the accounting rate of return is that it should be greater than the WACC. The acceptance level for the payback period is less than 3 years.
Table 2.1. Refer to the table below: Project outcomes using four assessment methods, for projects A, B, C and D
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Accounting Rate of Return
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Payback Period
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Net Present Value (NPV)
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Internal Rate of Return (IRR)
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Project A
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12%
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4.2 years
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£350,432
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17%
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Project B
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8%
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2.5 years
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£425,000
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11%
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Project C
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14%
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3.2 years
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£24,350
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18%
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Project D
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5%
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2.3 years
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£254,984
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10%
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You have been hired by the company to provide them with independent advice as to which project should be selected.
Please answer the following questions:
Question 1: Explain the importance of the Accounting Rate of Return, Payback Period, NPV and IRR in the assessment of a project.
Question 2: Examining each of these four projects in turn, advise the company as to the significance of the values presented in Table 2.1.
Question 3: Discuss the importance of correctly establishing a firm's cost of capital.
Question 4: Discuss the role scenario planning has in the assessment of new projects.
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