Question 1

There are three mutually exclusive projects X, Y and Z with the initial investment and yearly returns as given in the table below;

X Y Z

Cash outflow (200 000) (300 000) (380 000)

Cash inflows at the end of ;

Year 1 70 000 40 000 150 000

Year 2 50 000 50 000 120 000

Year 3 80 000 60 000 105 000

Year 4 40 000 90 000 75 000

Year 5 30 000 140 000 50 000

The discount rate is 10%

(a) Which Project will be selected under?

(i) Payback period (7 marks)

(ii) Net Present Value (10 marks).

(b) Explain what would be the selection decision if the projects were independent of each other, (3 marks).

(c) Examine the payback period as a technique for approval of projects. (5 marks).