Question: The finance manager of Willow plc is evaluating two mutually exclusive projects with the following cash flows:
|
Year
|
Project A (£)
|
Project B (£)
|
|
0
|
-110,000
|
-200,000
|
|
1
|
45,000
|
50,000
|
|
2
|
45,000
|
50,000
|
|
3
|
30,000
|
50,000
|
|
4
|
20,000
|
100,000
|
|
5
|
20,000
|
55,000
|
Willow's cost of capital is 10% and both investments have zero scrap value. The company's current Return on Capital Employed (ROCE) is 12% (calculated on an average investment basis). Additionally, the company is using the method of straight- line depreciation over the life of the projects.
Required: Advice Willow which projects should be undertaken if:
1. Net Present Value (NPV) and Internal Rate of Return (IRR) method of investment appraisal is used.
2. The ROCE method of investment appraisal is used.
3. Explain in short why NPV is the most popular investment appraisal technique.
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