Question
he directors of Kish Limited are considering two investment proposals, details of which are as follows. Project Alpha Project Beta 000 000 Initial investment 300
he directors of Kish Limited are considering two investment proposals, details of which are as follows.
| Project Alpha |
| Project Beta |
| 000 |
| 000 |
Initial investment | 300 |
| 270 |
Net cash inflows year 1 | 50 |
| 90 |
Net cash inflows year 2 | 75 |
| 90 |
Net cash inflows year 3 | 100 |
| 90 |
Net cash inflows year 4 | 125 |
| 80 |
Net cash inflows year 5 | 150 |
| 80 |
Net sale proceeds of project assets at the end of year 5 | 60 |
| 20 |
Required
a) Using the above information, for each of the projects Alpha and Beta, calculate:
i) The Accounting Rate of Return.
ii) The Payback Period.
iii) The Net Present Value using a discount rate of 12%.
Note: Extract of Present Value Tables are on page 12.
(14 marks)
b) State, with reasons, which ONE of the two investment projects the directors of Kish Limited should accept. (5 marks)
d) Discuss why the Net Present Value method of investment appraisal is considered to be theoretically superior to other methods that are found in practice.
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