Anderson Ltd has a limited capital budget available for investment in suitable projects this year, and has shortlisted two possible choices. Details are as follows:
Project A Project B
Capital cost £2,400,000 £2,700,000
Expected life 5 years 5 years
Residual value nil nil
Budgeted cash inflows: £000 £000
Year 1 190 310
Year 2 900 1,000
Year 3 1,200 1,300
Year 4 700 500
Year 5 400 200
The cost of capital to LBW Ltd is 9%
Extracts from NPV tables are as follows:
Year 9% 10% 11%
1 .920 .909 .893
2 .842 .826 .793
3 .772 .751 .712
4 .708 .683 .567
5 .650 .621 .507
TASKS
a) Calculate the payback period for EACH project. [3]
b) Calculate the accounting rate of return for EACH project. [4]
c) Calculate the NPV for EACH project. [8]
d) State which project you would recommend (if any). [1]
e) Explain why it is important to use investment appraisal techniques, and to monitor actual results. [4]