ASSIGNMENT OBJECTIVES:
To explore capital investment options and to make appropriate financial and economic
decisions. This assignment would assist in developing project skills in project
assessment and evaluation, to be analytical and to engage in critical thinking and
problem solving in evaluating alternative courses of action in a real-world scenario.
ASSIGNMENT QUESTION :
QUESTION 1
Blackwell Ltd., a steel manufacturer is considering the selection of one from two mutually
exclusive investment projects, each with an estimated five-year life. Project A costs
$1,616,000 and is predicted to generate annual cash flow of $500,000. Its estimated
residual value after five years is $301,000. Project B, costing $556,000 and with a scrap
value of $56,000, should generate annual cash flow of $200,000. The company operates
a straight-line depreciation policy and discounts cash flows at 15 per cent per annum.
The project manager at Blackwell Ltd., uses four different investment appraisal
techniques : net present value, internal rate of return, payback period, and the
accounting rate of return.
TASK 1
a. Make the appropriate calculations for each of the four techniques and provide
reasons for your investment advice.
b. List and discuss the strengths and drawbacks of each of the four investment
appraisal techniques.
QUESTION 2
Markets do not allocate resources efficiently in the presence of market failures such as
market power and externalities. With relevant examples, explain why each type of
market failure may cause market outcomes to be inefficient.