Assignment

Investment Alternatives and Capital Budgeting

The expected cash flows of three investment projects — Project Alpha, Beta, Charlie and Delta — for the next ten years are provided in the table below; year 0 as an initial period and year 1 to year 10. 

As a professional accountant of Sage Accounting Ltd., you are required to provide critical advice to your client on the best investment decision — whether to invest in the project of Alpha, Beta, Charlie or Delta

In order to maximize the investment return to your client, you are required to employ seven main investment appraisal techniques such as the techniques of PBP (Payback Period), Discounted PBP, ROCE (Return on Capital Employed), NPV (Net Present Value), IRR (Internal Rate of Return), Modified IRR and a stability test. 

With the prevailing interest rate in the lending and borrowing markets, as a professional accountant you consider that the required rate of return at present is 12 per cent. 

Required tasks

1)Calculate the Pay Back Period (PBP) and Discounted PBP of each project. 

2)Show the ranking of the projects by employing PBP and Discounted PBP criteria, and advise your client on the best investment action. 

3)Calculate the ROCE of each project. 

4)Show the ranking of the projects by using ROCE criteria, and advise your client on the best investment action. 

5)Calculate the NPV of each project. 

6)Show the ranking of the projects by utilising NVP criteria, and advise your client on the best investment action. 

7)Calculate the IRR and modified IRR

8)Show the ranking of the projects by using IRR and MIRR criteria, and advise your client on the best investment action. 

9)Critically comment on the stability (fluctuation) of all projects.

10)Show the overall rankings of all projects by each of the seven criteria. 

11)Critically discuss the main superiority (+) of the methods of capital budgeting decision (such as PBP, Discounted PBP, ROCE, NPV, IRR and MIRR) as well as the main drawbacks (-).

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