Cash flows (£000s) Proposal 1 Proposal 2 Proposal 3 Proposal 4
Year 0 -£120 -£95 -£80 -£160
Year 1 £80 £10 £30 £30
Year 2 £60 £40 £40 £50
Year 3 £40 £40 £30 £90
Year 4 £20 £60 £30 £80
Year 5 -£40 £50 £20 £60
Residual value £0 £5 £0 £40
The cash flows for year 5 include, where applicable, the sale of the fixed assets purchased
(year 0) at residual value. The company’s cost of capital is 10%.
Required:
a) Calculate payback, accounting rate of return (ARR), internal rate of return (IRR) and
net present value (NPV) for each proposal.
b) Identify which proposal should be selected by the company and explain, with
reference to the figures calculated for part (a), why that proposal should be selected
NdadiBegginer
1 Answer