ADMT assignment

You are required to provide an evaluation of two proposed projects Both five year expected lives and identical outlays of £ 125 000 Both involve additions to AP ltd highly successful range For both the cost of capital has been set at 12% Expected cash flow Year 1 2 3 4 5 Project A (£125 000) £ 22 000 £ 31 000 £ 43 000 £ 52 000 £ 71 000 Project B (£125 000) £ 43 000 £ 43 000 £ 43 000 £ 43 000 £ 43 000

£ 22 000 £ 53 000 £ 96 000 £ 148 000 £ 219 000

£ 43 000 £ 86 000 £ 129 000 £ 172 000 £ 215 000

In evaluating the projects please respond to the following questions a) Investment appraisal should add value to the business entity. Do you agree? (9%) b) What is the payback period of each project? If AP Ltd imposes a 3 year maximum payback period which of these should be accepted? (7%) c) What are the criticisms of the payback method? (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) What would happen to the NPV if: The cost of Capital increased The cost of capital decreased? (8%) g) Determine IRR for each project. Should they be accepted? (20%) h) How does the cost of capital affect the project’s IRR i) Compare the effectiveness of the NPV method with the IRR method (10%)

thetimes100. The appraisal method selected will be the decisive factor for a company selecting for or against a project which in turn will determine the company’s success (Anon.A.d. As the function of investment for a company is to purchase or create new assets with the objective of making gains in the future. investment appraisal plays a very important role in decision making selecting the best investment for the company. However in most circumstances investment appraisal does add value to a company as it is a very important method to evaluate the right investment. n. This would be where the net present value is equal to zero (NPV = 0).uk/theory/theory--investment-appraisal-380. Year 1 2 3 4 5 Project A (£125 000) £ 22 000 £ 31 000 £ 43 000 £ 52 000 £ 71 000 Net Cash Flow £ 22 000 £ 53 000 £ 96 000 £ 148 000 £ 219 000 Project B (£125 000) £ 43 000 £ 43 000 £ 43 000 £ 43 000 £ 43 000 £ 43 000 £ 86 000 £ 129 000 £ 172 000 £ 215 000 Payback for Project A 3 years + . In theory it is supposed to add value to a company. meaning it does not add value or lose value. Read more: http://www..php#ixzz1Ym5Uf8ov is a scientific method that follows a logical progression to work out which project optio B. however every now and then companies will accept a project that does not add value to the company.). Yes I agree with this statement.co. based on strategic positioning.

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