Reference no: EM132543880

Mitchell, Inc., is considering two mutually exclusive projects. Project 1 requires an investment of £80 000, while Project 2 requires an investment of £90 000.

Cash revenues and cash costs for each project are shown below:

Project 1

YEAR             1          2             3          4

Revenues £30 000 £50 000 £70 000 £90 000

Variable costs 8 000 12 000 20 000 25 000

Fixed costs 12 000 10 000 10 000 10 000

Project 2

YEAR            1           2                3         4

Revenues £65 000 £80 000 £60 000 £40 000

Variable costs 15 000 30 000 14 000 12 000

Fixed costs 5 000 20 000 10 000 8 000

The company estimates that at the end of the fourth year Project 1 would have a salvage value of £10 000 and Project 2 would have a salvage value of £5000.

Question (a) Determine the net present value of EACH project using an 8 per cent discount rate.

Question (b) Write a memorandum for management stating your recommendation. Include supporting calculations in good form.