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

Required:

(a) Calculate for each project: (i) average annual rate of return on average capital invested; (ii) payback period; (iii) net present value. (12 marks)

(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. (10 marks)

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Initial capital expenditure Profit (loss) year 1 25 000 Project A 50 000 Project B 50 000 10000 2 20 000 10 000 3 4 15 000 14 000 10 000 26 000 Estimated resale value end of year 4 10000 10 000 Notes: (1) Profit is calculated after deducting straight-line depreciation (2) The cost of capital is 10%.