80.2K

Verified Solution

Link Copied!

A small business has a choice of investing 400,00 in one of two projects. The expected cash flow from these two projects over a four year period is given below:

Year	1	2	3	4
Project A cash flow	90,000	101,000	109,000	141,000
Project B cash flow	10,000	60,000	120,000	190,000

1. (i) Which of these projects would you advise the small business to invest in when interest is compounded annually at 5%?

2. (ii) What would be your advice if interest was compounded annually at 2%?

3. (iii) Calculate the Internal Rate of Return (IRR) for each project.

4. (iv) Explain the purpose of IRR in investment appraisal.

5. (b) A business project with an 5 year life span and an initial cost of 56,000 generates revenues of -6,000 in year 1, 9,000 in year 2, 18,000 in years 3 and 4, and 21,000 in year 5

   [20 marks]

6. (i) Briefly explain the Net Present Value (NPV) method of investment appraisal and the assumptions that are made when employing this technique.

7. (ii) What is the Net Present Value of the project if the discount rate is: 1%, 2%, 3% and 4% (explain your calculations)

8. (iii) Graph the Net Present Value of the project obtained for each interest rate in part ii).

9. (iv) Approximate the Internal Rate of Return for this project and explain this construct.

Answer & Explanation Solved by verified expert

See Answer