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12 marksInvestment Appraisal

CAPE Management of Business Unit 1 · 2007 · Paper 2 · Question 5(a)

A company is considering investing in one of three projects (A, B, or C). Initial costs and annual cash flows over 5 years are provided, along with an option to borrow at 11% interest per annum.

Show the cumulative cash flow for EACH project.

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Other parts of this question

  1. 5(b)Compute the payback period in years, to one decimal place, for EACH project.[6 marks]
  2. 5(c)Indicate which project the company should accept and why based on the payback period.[2 marks]
  3. 5(d)Outline ONE advantage and ONE disadvantage of using the payback period as a project appraisal criterion.[2 marks]
  4. 5(e)Assume the IRR [Internal Rates of Return] for the respective projects are: Project A = 11.5%, Project B = 8%, Project C = 15%. Indicate which project the…[3 marks]

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