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Universal PLC is considering two mutually exclusive project proposals for new investment. The initial outlay of...

  1. Universal PLC is considering two mutually exclusive project proposals for new investment. The initial outlay of both projects is £300,000 but will yield different levels of cash flows over the life of the project. The projects are estimated to last for five years. They will have no residual value at the end of their lives. Depreciation is charged on a straight-line basis. The company uses a 6% discount rate for the cost of capital. The cash flows of both projects are as follows:

Year

    Project A

Cash flows

   Project B

Cash flows

1

80000

100000

2

80000

100000

3

80000

90000

4

100000

80000

5

100000

40000

Required:

  1. Appraise each project using:
  1. The payback method                                                       [10 Marks]

                                                                                                 

  1. The Net present value method                                         [8 Marks]

Based on your results from (a), explain which project the company should choose.

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Expert Solution


jeff jeffy answered 2 years ago
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