A property company wishes to develop a site it owns. Three sizes of property are being considered and the cots and revenues are as follows:

Year 0 Expenditure m

Year 1 to perpetuity Rentals p.a. m

Small development

2

0.6

Medium development

4

1

Large development

6

1.35

The projects are mutually exclusive because the building of one size of development excludes the others. The following results were obtained for the payback, NPV and IRR calculations using a cost of capital of 10%:

Year 0 Expenditure m

Year 1 to perpetuity P.V. of rentals m

Payback (years)

NPV (m)

IRR (%)

Small

2

6

3.33

4

30

Medium

4

10

4

6

25

Large

6

13.5

4.44

7.5

22.5

You are asked to use the data presented above to critically evaluate the various advantages and disadvantages and limitations (if any) of using the payback, NPV and IRR as alternative methods of investment appraisal.

Task 2

A family owns a chain of supermarkets in the form of a private company. Its present annual turnover is just over 200 million Euros and is currently entirely owned by the five family members. The company wishes to finance the building of a new supermarket which will take two years before it can start operating profitably. The company needs 30 million Euros to build the supermarket. Critically evaluate the various methods which are available to the owners to finance the project.

Answer rating: 100% (QA)

Task 1 Evaluation of Investment Appraisal Methods Payback Period Advantages Simple to calculate easy to understand focuses on cash flow recovery Disadvantages Ignores cash flows after the payback peri... View the full answer