Question 2

The manager of War Games has two potential games to develop, Nimrod and F1-11. The design teams have provided the following free cash flow forecasts. The cost of capital is 7%.

Time period	Nimrod	F1-11
Initial Investment	1,000,000	1,200,000
Year 1	300,000	200,000
Year 2	950,000	600,000
Year 3	650,000	1,200,000
Year 4	600,000	1,400,000

1. Calculate the Net Present Value of each project and advise the manager which project(s), he should accept.

15. marks)

2. Assuming that the manager has only 1,200,000 to invest.

(i) Which project should he choose using the NPV method?

(ii) Would the choice be different using the Payback method?

(10 marks)

3. Explain why some managers prefer the payback method to NPV?

(5 marks)