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Question 3 You are a Corporate Finance Manager at Argonauts plc, a leading operator of domestic waste recycling and incineration services in London, UK. New legislation on air quality and emissions control means that the company must invest in new incineration facilities. Two possible investment options have been identified. Each option has an expected life of ten years. Sufficient funding is available to finance only one of the options. Initial cost (year 0) Scrap value (year 10) Option A 000 200,250 310 Option B 000 210,260 425 Forecast net cash inflows Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 40,000 50,000 45,000 50,000 55,000 50,000 45,000 40,000 40,000 35,000 60,000 45,000 50,000 50,000 50,000 40,000 40,000 35,000 30,000 30,000 Assume that all cash flows occur at the end of the respective year. Argonauts plc has a cost of capital of 16 per cent. The company's approach to investment appraisal was discussed at a recent meeting of Argonauts plc's senior executive team. Jiamin Belicek, Chief Executive at Argonauts plc, is keen to understand the qualitative factors that might need to be considered in addition to the results of a quantitative investment appraisal. Jiamin has commented: Quantitative investment appraisal only tells part of the story. We need to consider the qualitative factors that might be relevant to this decision, too. Sydney Giroud, Director of Finance at Argonauts pic, has highlighted that successful investment appraisal involves a number of practical issues. Sydney Giroud has commented: Investment appraisal techniques such as payback, accounting rate of return and net present value are useful, but there are several practical points to bear in mind when using these techniques. I would like to know more about these practical points. Required: (a) Calculate the accounting rate of return for both option A and option B. Assume that the only difference between cash flow and profit is the depreciation charge. (4 marks) (b) Calculate the net present value of option A and option B. Use Argonauts ple's cost of capital as the discount rate. (6 marks) (c) Critically evaluate the net present value technique. (8 marks) (d) Advise Argonauts plc's senior executive team on the comments made by Jiamin Belicek and Sydney Giroud. Your advice should include an explanation of the qualitative factors that will need to be considered before making a decision about which option the company should choose and any additional information that might aid the investment appraisal process. (7 marks)

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