PGBM01 - MBA Financial Management And Control (2015-16 Trm1 A)

1. Workshop Question
You are the finance director of an imaginary company Pluto PLC. You have been
given the following information relating to two potential projects, but due to
limited capital funds only one can be selected. The following data is available for
each project:
Project A Project B
Initial Investment £250,000 £250,000
Cash Inflows:
Year 1 £75,000 £90,000
Year 2 £65,000 £55,000
Year 3 £100,000 £90,000
Year 4 £125,000 £150,000
The depreciation for both projects is £50,000 per year.
The residual value for both projects is £50,000.
You are required to calculate:-
a. Payback Period (PP).
b. Accounting Rate of Return (ARR).
c. Net Present Value (NPV).
d. Internal Rate of Return (IRR).
Comment on the results you have found assessing which of the two projects
should be chosen. Additionally discuss the benefits and limitations associated
with each of the investment appraisal techniques that have been used.
Discount factors of 14% & 25% are given below:-
Discount Factor 14% Discount Factor 25%
Year 0 1.000 1.000
Year 1 0.877 0.800
Year 2 0.769 0.640
Year 3 0.675 0.512
Year 4 0.592 0.4096