Answer to Question #245053 in Economics for sammy

Question

Mr. Atiamoh believes that all the two projects have risk characteristics similar to the average risk of the firm and hence NextG’s cost of capital of 10 per cent will apply to them and both investment projects have zero scrap value. The company’s current return on capital employed is 12 per cent (average investment basis) and the company uses straightline depreciation over the life of projects. Year Project (A) Gh₵ Project (B) Gh₵ 0 (110,000) (200,000) 1 45,000 50,000 2 45,000 50,000 3 30,000 50,000 4 30,000 100,000 5 20,000 55000 Required a) Advise NextG’s executive committee which project should be undertaken if: i. the net present value method of investment appraisal is used; ii. the internal rate of return method of investment appraisal is used; b) Critically discuss the reasons for superiority of the net present value method over the other methods. Is the internal rate of return method now redundant? [ 9 marks]

Answer 1

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