Problem
The finance manager of Steel PLC is evaluating two capital investment projects which may assist the company in achieving its business objectives. Both projects will require an initial investment of £500,000 in plant and machinery, but it is not expected that any additional investment in working capital will be needed.
The expected cash flows of the two projects are as follows:
Period Broad Project (£) Keeling Project (£)
1 60,000 220,000
2 90,000 220,000
3 140,000 50,000
4 210,000 50,000
5 300,000 50,000
6 140,000 50,000
7 100,000 200,000
The cost of capital of Steel PLC is 10%.
Task
1. For both the Broad and Keeling Projects, calculate the return on capital employed (using average investment), the net present value, and the internal rate of return.
2. If the Broad and Keeling Projects are mutually exclusive, advise Steel PLC which project should be undertaken.