UESTION 2
Quick Freeze Foods Co produces a range of convenience processed foods for a number of supermarket chain stores. Its success has been based on the expertise and customer-driven emphasis of its research and development team. The R&D team has identified two mutually exclusive projects which could be undertaken. The finance director has recruited you as assistant accountant to carry out a financial evaluation of each project.
Details of the three projects’ cash flow are shown below;
| Indian range | Chinese range | |
| $ | $ | |
| Initial outlay | (80,000) | (20,000) |
| 1 | 26,5000 | 5,000 |
| 2 | 26,5000 | 6,000 |
| 3 | 26,5000 | 8,000 |
| 4 | 26,500 | 10,000 |
Assume that cash flows occur at the ends of each of the years shown.
Required:
- Using each of the following appraisal methods rank the projects in order of their investment potential.
i) Net present value (NPV) at 10%. (10 marks)
ii) Approximate internal rate of return (IRR). (8 marks)
- Critically compare each of the above investment appraisal methods. (2 marks)
(Total: 20 marks)
1 Answer