For revision purpose only

QUESTION #3

Broadworld Manufacturing Company Ltdis considering investing in one of two projects - X or Y. The initial cost and net cash inflows from each project are shown below. The discount rate for both projects is 13% per cent.

Cash Flow	Project X	Project Y
	$	$
Initial Cost	1,000,000	1,000,000
Net Cash Inflows
Year 1	300,000	300,000
Year 2	150,000	400,000
Year 3	200,000	500,000
Year 4	250,000	600,000
Year 5	200,000	700,000

Discount factors for the projects at 13% percent per annum are shown below.

Year	Factor
1	0.8850
2	0.7831
3	0.6931
4	0.6133
5	0.5428

Required (Please do in excel format and in $000,000,000 where applicable so I can follow easily):

(a) Calculate the payback period for each project and identify the project in which the company should invest. Give ONE (1) reason for your choice.

(b) Calculate the Accounting Rate of Return on initial capital for each project.

(c) Calculate the Accounting Rate of Return on average capital for each project.

(d) Calculate the net present value (NPV) for each project and identify the project in which the company should invest. Give ONE (1) reason for your choice.