Carling Ltd is a manufacturer of industrial drills. It has £1M earmarked for capital investment

2. Carling Ltd is a manufacturer of industrial drills.  It has £1M earmarked for capital investment in the current year and the Board has identified two projects (each requiring an initial outlay of £1M) from which it will choose.
The company's capital structure at present is:

The two rival projects have anticipated costs and income flows as follows:

Cost 5% 10%

Ordinary shares

Preference shares

Debentures

14Total capital

Income - Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Total income

TeessideUniversity Open Learning

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3

Project 2Project 1

£'000

1000

600

200

150

250

350

200

1750

  £M

  3

  4

  7

£'000

1000

100

150

750

450

150

200

1800

4

(a) The Board is considering funding the investment by either a £1M shares issue or a £1M 10% debenture issue.  You are asked to explain which method you would choose.

(b) You are asked to evaluate the two projects using:

(i) the payback method (by plotting the data)

(ii) the DCF/NPV technique (assume a 12% cost of capital).

(c) A Board member asks whether risk and uncertainty should be taken into account.  You are asked to write a brief report outlining the arguments for and against the suggestion.

3. Using the data from TABLES 1, 2 and 3 below, plot the following graphs:

(i) On one set of axes plot the 2 curves of:

• ‘total sales revenue’ against ‘volume of sales’

• ‘total costs’ against ‘volume of sales’.

The ‘volume of sales’ should be on the x-axis (values from 20 to 26).

(ii) On a second set of axes plot the 3 graphs:

• ‘marginal cost’ against ‘volume of sales’

• ‘marginal revenue’ against ‘volume of sales’

• ‘price’ against ‘volume of sales’.

Again the ‘volume of sales’ should be on the x-axis (values from 20

to 26).

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