Lapsol limited manufacture electrical appliances for the export market. The management of the company are considering investing in one of two possible capital expenditure projects. Due to financial constraints, only one of the projects can be accepted. You are presented with the following information in relation to the projects:
1) working capital for each project will be required from the outset and will be recovered at the end of the project's life;
2) An IDA grant, equal to 15% of the cost of the asset, will be received at the end of year 1. The IDA grant has not been included in the projected net cash receipts.
3) The company's cost of capital is 12%;
4) The company has already spent €150,000 in consulting fees on this capital investment project.
(a) Caculate the following in respect of both projects:
Discounted payback period
Net Present Value
Internal Rate of return
(b) Assess each project, stating your opinion and which project, if any, should be accepted.