Question
Formidable co. Ltd has a target return on capital employed of 22% and the directors are proposing the following projects to the shareholders in the
Formidable co. Ltd has a target return on capital employed of 22% and the directors are proposing the following projects to the shareholders in the next annual general meeting for approval. The company chairman has recommended the use of return on capital employed (ROCE).
Project ZEE Capital cost of asset: sh.4,500,000. Estimated life 5 years.
Estimated profit before asset depreciation: Period I: 2,000,000 Period II: 1,700,000 Period III: 1,400,000 Period IV: 1,100,000 Period V: 700,000
Project YEP Capital cost of asset sh.6, 000,000
Estimated profit before asset depreciation: Period I: 2,000,000 Period II: 2,000,000 Period III: 2,400,000 Period IV: 2,400,000 Period V: 2,400,000
The capital assets would be depreciated by 20% of its cost each year.
You are required to evaluate the projects using one non-discounting and discounting technique and recommend which project should be authorized for implementation
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