Costco supermarket is using an ABC marketing matrix as a framework for deciding upon its potential strategies for future growth.A series of ABC growth strategies can set the direction for the company‘s strategy such as market penetration (project A), market development (project B), product development (project C) and diversification (project D).At present, the company is not willing to consider project C (product development) and D (diversification strategy) owing to the risks involved in manufacturing, launching and marketing new products.Following market and financial research conducted by the company, the expected cash flows of two marketing projects (A and B) for the next ten years are provided in the table below.As the accounting consultant of COSTCO supermarket Ltd, you are required to provide critical advice to a client on the best investment decision, on whether to invest in marketing projects A or B.In order to maximize the investment return to your client, you are required to employ five main investment appraisal techniques such as the techniques of PP (Payback Period), ARR (Accounting Rate of Return), NPV (Net Present Value), IRR (Internal Rate of Return) and Discounted PP.With the prevailing interest rate in the lending and borrowing markets, as a professional accountant, you consider that the cost of capital (r or i) at present is 5 per cent.

Required

1. You are required to calculate the PP, ARR, NPV, IRR and Discounted PP of each project. 

2. Discuss the detailed advantages (strengths) and disadvantages (weaknesses) of each method of investment appraisal techniques. 

3. You are required to comment on the stability and the sensitivity analysis of the project. 

4. Show the ranking of the projects using all the above criteria, and as a professional accountant, critically advise your client on the best investment action, on whether to invest in project A or B.

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Period Year O Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Project A () Project B () -1000 -1000 70 100 80 0 90 400 100 0 110 100 120 200 130 0 140 100 150 0 210 300 Period Year O Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Project A () Project B () -1000 -1000 70 100 80 0 90 400 100 0 110 100 120 200 130 0 140 100 150 0 210 300

Answer rating: 100% (QA)

Costco Supermarket Analysis 1 Payback period PP This is defined as the duration of an investment to regain initial costs As such this duration will be employed as the method of capital budgeting in ev... View the full answer