Reed Elsevier is an Anglo-Dutch multinational publishing and information company that is co-headquartered in London, UK and in Amsterdam in the Netherlands. It publishes in the science, medical, legal, risk, marketing, financial, and business sectors. The Reed Elsevier group is a dual-listed company consisting of Reed Elsevier PLC (listed in London and New York) and Reed Elsevier NV (listed in Amsterdam and New York).
Mammon Ltd has an empty factory space that could be used to expand the current product portfolio. Several proposals have been submitted in relation to using this vacant area. Each proposal would fully use the vacant factory space but only one of the proposals can be financed.
The following information was obtained for each of the projects:
| Net Cash flows (£0000s) | P1 | P2 | P3 | P4 |
| Year 0 | -£120 | -£95 | -£80 | -£160 |
| Year 1 | £80 | £10 | £30 | £30 |
| Year 2 | £60 | £40 | £40 | £50 |
| Year 3 | £40 | £40 | £30 | £90 |
| Year 4 | £20 | £60 | £30 | £80 |
| Year 5 | -£20 | £50 | £20 | £60 |
| Year 6 | -£25 | £45 | £8 | £30 |
| Residual value | £1.25 | £0.5 | £2.6 | £3.5 |
The cash flows for year 6 include, where applicable, the sale or disposal costs of the non-current assets purchased (year 0) at residual (scrap/disposal) value/costs. The company’s forecast cost of capital is 8%. The company’s target rate of return is 60%.
8% Discounted Cash Flow (DCF)
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| DCF | 1 | 0.93 | 0.86 | 0.79 | 0.74 | 0.68 | 0.63 |
30% DCF
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| DCF | 1 | 0.77 | 0.59 | 0.46 | 0.35 | 0.27 | 0.21 |
Required:
- Calculate in the format taught on the course the
| I. | The Payback period for each project in years to two decimal points |
| II. | The 8% discounted payback period of each project in years to two decimal points. |
| III. | The 8% Net Present Value of each project to two decimal points and the Profit % Indexation to two decimal points |
| IV. | The percentage Accounting Rate of Return of each project to two decimal points |
| V. | The percentage Internal Rate of Return of each project to two decimal points |
(b)
Discuss and identify which project should be selected by the company and explain, with reference to the figures calculated for part (a), justify why that project should be selected.
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