You are required to provide an evaluation of two proposed projects, both with five year expected lives. Both projects involve additions to AP plc’s highly successful product range and as a result, the cost of capital on both projects has been set at 11.5%. The expected cash flows from each project are shown below.
In evaluating the projects please respond to the following questions:
appraisal should add value to the business entity. Critically evaluate this view? (36%)
(b) Calculate each project’s payback period, NPV and IRR (9%)
(c) For each of the above methods which project should be selected and explain why. (6%)
(d) Explain why it is essential that discounted cash flows should be calculated when making long term investment
(e) What would happen to the NPV if:
(1) The cost of capital increased?
(2) The cost of capital decreased? (4%)
(f) Explain why the NPV of a relatively long term
project is more sensitive to changes in the cost of capital than is the NPV of a short term
(g) How does a change in the cost of capital affect the project’s IRR? (5%)
(i) Compare the effectiveness of the NPV method with that of the IRR method (15%)
PROJECT A PROJECT B
Year 0 (18) (27)
1 4.5 6.5
2 4.5 7
3 4.5 8.5
4 4.5 7.5
5 4.5 6
Please help to finish this and many thanks.
[ Order Custom Essay ]
[ View Full Essay ]