The following information relates to Ross Hill limited. The company has an opportunity to invest in one of two potential & mutually exclusive (but not both) projects

Capital Investment Appraisal:
The following information relates to Ross Hill limited. The company has an opportunity to invest in one
of two potential & mutually exclusive (but not both) projects. Each project will involve the purchase of a
new Plant. The following data relates to the two projects:
Net Profit Project A Project B
Plant 1 Plant 2
2020 45,000 10,000
2021 45,000 15,000
2022 45,000 25,000
2023 35,000 55,000
2024 35,000 65,000
2025 25,000 50,000
230,000 220,000
Additional Information:
• The initial cash investment for both plants will be £11,0000. The purchase would
take place on January 1, 2020. It is assumed that all other cash flows would be
received on 31 December each year.
• Both plants would have a life of six years. Plant 1 has no residual value and plant 2
has a residual value of £8,000.
• The company uses a straight-line method of depreciation.
• The cost of capital is 16%.
a) Using appropriate investment appraisal techniques, advise senior management on whether
they should opt for project A or project B. (20 Marks)
b) Discuss the limitations of using investment appraisal techniques in long term decision making.
(10 Marks)
(Total: 30 marks)

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