Coventry Foods Ltd. is a well-known company in the food services sector and has been running successfully for the last 10 years. The company is listed in London Stock Exchange (LSE) and has been maintaining good reputation in the market for strong corporate governance system across the company. The company now anticipates a rise in customer demands due to the recent lifting of Covid lockdown across the UK. Therefore Coventry Foods Ltd. is considering an investment in new machinery to meet supply. The machinery at the start of the project would cost 450,000 and at the end of year five, the company anticipate that the machines will have to be scrapped. The company will realise 55,000 from the sale of the machinery at the end of year five. The company uses the straight-line method for depreciation of all assets. The annual profits/(losses) after charging depreciation are estimated to be:

Year

Profit / lose

1

(80,000)

2

45,000

3

64,000

4

110,000

5

150,000

The companys Chief Financial Officer (CFO) has asked you to evaluate the project to see how quickly it will pay back. Coventry Foods Ltd. expects a maximum payback period of four years. You offer to appraise the project using the various project appraisal techniques. The businesss cost of capital is 8%. Ignore taxation. (Hint: net cash flow can be calculated by adding back the depreciation to yearly profit/loss).

Required

a. Calculate the accounting rate of return (ARR) of the project. (6 marks)