he directors of Gear plc need to appraise two capital investment projects (X and Y) and deicide which one they need to invest their money in. Both projects have estimated life of five years and require £2,000,000 as an initial expenditure however, project Y requires an additional £130,000 as a working capital to support the investment. At the end of five years, it is expected that the residual value of project X will be £130,000 and £200,000 for project Y. The following is the best cash forecasts for net cash flows over the 5 years: Year Project X Project Y £ £ 1 685,000 530,000 2 765,000 558,000 3 831,000 598,000 4 552,000 670,000 5 135,000 900,000 - Present value rate at 13% Year 1 2 3 4 5 Rate 0.885 0.783 0.693 0.613 0.543 Required Evaluate the two projects using the following two methods: i) Payback period. ii) Net present value using 13% as a discount rate.
The directors of Gear plc need to appraise two capital investment projects (X and Y) and deicide which one they need to invest their money in. Both projects have estimated life of five years and require £2,000,000 as an initial expenditure however, project Y requires an additional £130,000 as a
At the end of five years, it is expected that the residual value of project X will be £130,000 and £200,000 for project Y.
The following is the best cash
Year Project X Project Y
£ £
1 685,000 530,000
2 765,000 558,000
3 831,000 598,000
4 552,000 670,000
5 135,000 900,000
- Present value rate at 13%
Year 1 2 3 4 5
Rate 0.885 0.783 0.693 0.613 0.543
Required
Evaluate the two projects using the following two methods:
- i) Payback period.
- ii)
Net present value using 13% as a discount rate.
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