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Limitations of using investment appraisal techniques

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Reference no: EM132753293

Capital Investment Appraisal:

The following information relates to Ross Hill limited. The company has an opportunity to invest in one of two potential & mutually exclusive (but not both) projects. Each project will involve the purchase of a new Plant. The following data relates to the two projects:

Net Profit Project A Project B

Plant 1 Plant 2

2020 45,000 10,000

2021 45,000 15,000

2022 45,000 25,000

2023 35,000 55,000

2024 35,000 85,000

2025 25,000 50,000

230,000 220,000

Additional Information:

  • The initial cash investment for both plants will be £11,0000. The purchase would take place on January 1, 2020. It is assumed that all other cash flows would be received on 31 December each year.
  • Both plants would have a life of six years. Plant 1 has no residual value and plant 2 has a residual value of £8,000.
  • The company uses a straight-line method of depreciation.
  • The cost of capital is 16%.

Required:

  1. Using appropriate investment appraisal techniques, advise senior management on whether they should opt for project A or project B.
  2. Discuss the limitations of using investment appraisal techniques in long term decision making.

Reference no: EM132753293

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