In order to improve its liquidity position Anchors Investors Ltd is considering investing in three projects; Project P, Project Q and Project R with initial investments of $2,000,000, $4,000,000 and $5,000,000 respectively. Each project is expected to have a life of five (5) years.

The profits generated by the projects are as follows:

After tax and depreciation profits

Year

Project P

Project Q

Project R

1

500,000

1,200,000

1,600,000

2

500,000

1,000,000

1,100,000

3

500,000

1,250,000

1,300,000

4

500,000

1,200,000

1,400,000

5

500,000

900,000

1,200,000

Total

2,500,000

5,550,000

6,600,000

Required:

a.Calculate the average profit for each project. (3 marks)

b.Calculate the average capital for each project.(3 marks)

c.Calculate the accounting rate of return (ARR) on initial capital.(6 marks)

d.Calculate the accounting rate of return (ARR) on average capital.(6 marks)

e.State two (2) advantages associated with the use of the Payback method of project appraisal. (2 marks)