The following data are supplied relating to two investment projects, only one of which may be selected:

1 Profit is calculated after deducting straight line depreciation.
2 The cost of capital is 10 per cent.
Required:

(a) Calculate for each project:
(i) average annual rate of return on average capital invested (ii) payback period (iii) net present value.

(b) Briefly discuss the relative merits of the three methods of evaluation mentioned in

(a) above.

(c) Explain which project you would recommend for acceptance.

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Initial capital expenditure Profit (loss) year 1 Project A Project B () () 50,000 50,000 25,000 10,000 2 20,000 10,000 3 15,000 14,000 4 10,000 26,000 Estimated resale value at end of year 4 10,000 10,000