Generic PLC is considering two mutually exclusive project proposals for new investment. The initial outlay of both projects is 300,000 but will yield different levels of cash flows over the life of the project. The projects are estimated to last for five years. They will have no residual value at the end of their lives. Depreciation is charged on a straight line basis. The company uses a 6% discount rate for the cost of capital. The cash flows of both projects are as follows:

Year		Project A Cash flows	Project B Cash flows
1		80000	100000
2		80000	100000
3		80000	90000
4		100000	80000
5		100000	40000

Required:

1. Appraise each project using:
   1. The payback method

12 marks

2. The Net present value method

12 marks

2. Based on your results from (a), explain which project the company should choose.

5 marks

3. The project has a normal pattern of cash flows (i.e. an initial outflow followed by several years of inflows). What would be the effects of an increase in the companys cost of capital on the internal rate of return (IRR) of the chosen project. Would it be higher or lower?