Question 6 A firm is considering potential investment projects. Two projects are identified that have the cashflows desc

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Question 6 A Firm Is Considering Potential Investment Projects Two Projects Are Identified That Have The Cashflows Desc 1 (112.94 KiB) Viewed 40 times

Question 6 A firm is considering potential investment projects. Two projects are identified that have the cashflows described in Table 1 below. All figures are in £000's (i.e. 50 corresponds to £50,000). The firm is not subject to capital rationing Table 1: Possible Projects for Question 6 Year Project A Project B 0 -135 -220 1 20 28 2 32 45 3 64 114 4 48 98 5 21 43 (a) Define the two types of capital rationing and eplain why it is important that the firm in this question is not subject to capital rationing [3 marks] (b) Calculate the internal rate of return for each project to 1 decimal place (e.g. 99.9% is 1 decimal place) [7 marks] (c) Based upon your answer to (b), if the hurdle rate is 9% will the company invest in either project? [2 marks] (d) Assume that the initial cashflow represents the purchase of a machine. The project A machine can be sold for £25,000. The project B machine can be sold for £50,000. Assume that the sales are added to the year 5 cashflow. What is the accounting rate of return for each of the two projects? [6 marks] (e) With reference to these projects, evaluate the statement that "the firm should give more attention to the internal rate of return than the accounting rate of return when making investment decisions". [7 marks]