PGBM01 Financial Management & Control Workshop 9 Further Question

Question 1 Tarragon needs to choose between two mutually exclusive investment projects, each lasting for five years. The company uses straight-line method of depreciation and its cost of capital is 15 per cent. Project Alpha would generate annual cash inflows of £200,000 after the purchase of machinery costing £556,000, with a scrap value after five years of £56,000. Project Beta would generate annual cash inflows of £500,000 after the purchase of machinery costing £1,616,000, with a scrap value after five years of £301,000. Required: Calculate, for each project, the return on capital employed (ROCE), net present value, and payback period. Advise which project should be undertaken based upon the results calculated.