Jersey plc has an empty department in one of its factories that could be used to expand the production of current products or produce new products. Four proposals have been submitted in relation to using this department. Each proposal would fully use the empty department but only one of the proposals can be accepted. The company’s cost of capital is 9%.
The following information was obtained for the proposals:
|Cash flows (£000s)||Proposal 1||Proposal 2||Proposal 3||Proposal 4|
- Calculate IRR for the Project 1, net present value (NPV) for Project 2 and payback period for the project 4. [15 Marks]
|Investment appraisal technique||Proposal 1||Proposal 2||Proposal 3||Proposal 4|
|Payback||2 years||2.8 years||2.2 years||?|
- Suppose we have the cut-off period of 3 years. Determine which project should be accepted based on these three project appraisal methods? Explain your answer.
- Assume the projects are not mutually exclusive and funds are limited to £275,000. Indicate what the optimal investment is when:
- All projects are divisible
- All projects are indivisible
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