Intermediate: Calculation of payback, NPV and ARR for mutually exclusive projects Your company is considering investing in its own transport fleet. The present position is that carriage is contracted to an outside organization. The life of the transport fleet would be five years, after which time the vehicles would have to be disposed of.

The cost to your company of using the outside organization for its carriage needs is £250000 for this year. This cost, it is projected, will rise 10% per annum over the life of the project. The initial cost of the transport fleet would be £750000 and it is estimated that the following costs would be incurred over the next five years:

Other costs include depreciation. It is projected that the fleet would be sold for £150000 at the end of year 5. It has been agreed to depreciate the fleet on a straight line basis.
To raise funds for the project your company is proposing to raise a long-term loan at 12% interest rate per annum.
You are told that there is an alternative project that could be invested in using the funds raised, which has the following projected results:

As funds are limited, investment can only be made in one project.
Note: The transport fleet would be purchased at the beginning of the project and all other expendi¬ ture would be incurred at the end of each relevant year.
Required:

(a) Prepare a table showing the net cash savings to be made by the firm over the life of the transport fleet project. (5 marks)

(b) Calculate the following for the transport fleet project:
(i) Payback period (ii) Accounting rate of return (iii) Net present value (13 marks)

(c) Write a short report to the Investment Manager in your company outlining whether investment should be committed to the trans¬ port fleet or the alternative project outlined. Clearly state the reasons for your decision.
(7 marks) (Total 25 marks) AAT Cost Accounting and Budgeting

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Drivers' Costs Repairs & Maintenance Other Costs () () () Year 1 33 000 8000 130000 Year 2 35.000 13000 135 000 Year 3 36000 15000 140 000 Year 4 38 000 16000 136 000 Year 5 40 000 18000 142 000