Scenario 2 (Indicative word count is not applicable)

A private sector firm approaches you with the following estimated data concerning four potential investment projects: Project Red, Project Orange, Project Yellow and Project Green.

	Red ()	Orange ()	Yellow ()	Green ()
Year 0 Investment Cost	30,000	50,000	40,000	20,000
Year 1 Cash Inflow	12,000	20,000	15,000	14,000
Year 2 Cash Inflow	12,000	15,000	15,000	8,000
Year 3 Cash Inflow	12,000	12,000	15,000	5,000
Year 4 Cash Inflow	10,000	9,000	-	4,000
Year 5 Cash Inflow	4,000	8,000	-	-

Please show all steps of calculations during tasks where applicable.

1. Calculate the average rate of return for each project as a percentage to one decimal place and state the rank of the projects by their average rates of return from the highest to the lowest.

(5 marks)

2. Assuming linear monthly cash flows throughout each year, calculate the payback period for each project in years and months and state the rank of the projects by their payback periods from the shortest to the longest.

(5 marks)

3. Assuming an annual interest rate of 5%, calculate the net present value for each project in s to two decimal places and state the rank of the projects by their net present values from the highest to the lowest. (Hint: Leave the discount factors with as many decimal places as possible when carrying out the calculations and then round up the monetary amounts to two decimal places.)

(5 marks)

4. Using sensitivity analysis, suggest how sensitive the ranking of the first two projects is in relation to the following separate situations:

1. The required percentage change in the value of the investment cost for the second-best project according to the average rates of return in part a).
2. The required percentage change in the value of the Year 1 cash inflow for the second-best project according to the payback periods in part b).

(5 marks)

(Total for Scenario 2: 20 marks)