Exhibit 2: Cash flow Estimates of three (3) of the firm’s recent projects

	Life	Initial Investment	Cash Inflow
X	5	£386,400	£120,000
Y	10	£519,200	£120,000
Z	15	£609,000	£120,000

Required: A2 The company uses the payback period and accounting rate of return methods to appraise its project; the simplicity of these methods is attractive to management. You recently come across a study suggesting that similar companies as Abby Plc. use more sophisticated methods based on time value of money. You believe that a more reliable project appraisal could be made using any of the discounted cash flow methods. It is difficult to calculate the firm’s cost of capital but similar companies typically require a minimum return of 10% on equity finance. Abby Plc. is an all-equity financed firm.

Required

• Prepare a second report to management on its investment appraisal options. Your report should include:
• (A2i) A discussion of discounted cash flow methodologies and their assumptions.
• (A2ii) A quantitative analysis of each of the projects above using any two (2) discounted cash flow methods. (Also discuss the implications of your figures).
• (A2iii) A brief section discussing the treatments of working capital, scrap value, depreciation, taxes, capital rationing, unequal project lives, and inflation in investment appraisal.
• A3 Discuss why and how the choice of investment appraisal method and cost driver may partly explain a firm’s reported performance.