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five year expected lives and identical initial outlays of £115,000. Both projects involve additions to AP Ltd.’s highly successful product range and as a result, the cost of capital on both projects has been set at 11.5%. The expected cash flows from each project are shown below. In evaluating the projects please respond to the following questions: (a) Why is the investment appraisal process so important? (9%) (b) What is the payback period of each project? If AP Ltd imposes a 3 year maximum payback period which of these projects should be accepted? (7%) (c) What are the problems of the payback period? (6%) (d) Determine the NPV for each of these projects? Should they be accepted – explain why? (20%) (e) Describe the logic behind the NPV approach. (10%) (f) Discuss the relationship between NPV and cost of capital. (8%) (g) Calculate the IRR for each project. Should they be accepted? (20%) (h) How does a change in the cost of capital affect the project’s IRR? (10%) (i) Discuss why the NPV method is often regarded to be superior to the IRR method? (10%) PROJECT A £000 38 42 48 50 70 PROJECT B £000 43 43 43 43 43
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WORD LIMIT: 2000 WORDS FOR THE WHOLE ASSIGNMENT. The assignment will be assessed as follows: Presentation and structure 10% Content 40% Use of theory 40% References (Number & Variety) 10%