Reference no: EM133106780
Question - AIN Plc is considering investing in the transport industry and has estimated that the average beta (β) of firms in the industry is 1.2.
The company is faced with choosing between the following projects which are considered mutually exclusive:
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PROJECT NEXT LEVEL
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PROJECT GATEWAY
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Initial outlay
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£2,500,000
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£6,000,000
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Annual cash inflows
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£1,000,000
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£2,000,000
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Scrap or salvage value
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£250,000
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£1,000,000
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Expected life of the Project
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5 years
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5 years
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AIN Plc uses the straight-line method of depreciation. However, tax-allowable depreciation is 30% on a straight-line basis. If the Treasury bill rate is 4% and the expected return on the market is 12%, examine if AIN should undertake the projects using:
a) The Net Present Value (NPV).
b) The Internal Rate of Return (IRR).
c) Assuming the projects are independent and indivisible and that AIN Plc has up to £7,000,000 to invest:
i. Explain which projects should be accepted. Find the total net present value for the company's total investment.
ii. What will the total net present value be if the projects are independent and divisible, and AIN Plc has up to £7,000,000 to invest.
d) Explain two limitations or difficulties associated with the use of the Capital Asset Pricing Model (CAPM) to generate discount rates for project appraisal.
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