Shore Services Ltd is a gas-related company providing specialist rescue services to gas fields. The board of

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Shore Services Ltd is a gas-related company providing specialist rescue services to gas fields. The board of directors is considering a number of investment projects to improve the cash flow situation in the face of strong competition from international companies in the same area. The proposed projects are:

PROJECT NAME Description

ATHLONE Commission an additional firefighting vessel

BELFAST Replace two existing standby boats

CORK Establish a new survival training course for the staff of clients.

DUBLIN Install latest communication equipment on all vessels

Each project is expected to produce a reduction in cash outflows (ie savings) over the next five years. The outlays and cash savings are set out below:

End of year ATHLONE €’000 BELFAST €’000 CORK €’000 DUBLIN €’000

Outlay - (600) (300) (120) (210)

Cash flow savings: 1 435 - 48 81

2 435 - 48 81

3 - 219 48 81

4 - 219 48 81

5 - 219 48 81

Internal rate of return 28.8% 22.0% 28.6% 26.8%

Investment capital is limited to €1,000,000. The board wishes to maximise net present value of projects undertaken and requires a return of 10% per annum. Complete your workings by rounding to the nearest €’000

Required: (a) Prepare a report to the board of directors containing: 1. Calculations of net present value for each project, and 2. A reasoned recommendation on maximisation of net present value within the €1,000,000 investment fund (15 marks) (b) Why are cash flows rather than profit flows used in the IRR, NPV and Payback Period methods of investment appraisal?