INVESTMENT ANALYSIS

Organisation AAA is considering two mutually exclusive equipment for the next financial year. The accountant has provided you with the following information pertaining to the two equipment.

Equipment I Equipment II

Initial cash outlay $200,000 $240,000

Net profit after tax:

Year 1 30,000 70,000

2 50,000 75,000

3 70,000 80,000

4 90,000 85,000

5 95,000 90,000

Salvage value 50,000 60,000

Both equipment have useful lives of 5 years. You are to use the straight line depreciation method for the equipment.

REQUIRED:

a. Identify which of the two projects has a higher Accounting rate of return (ARR). Show all workings.

b. Compute the net present value of each project at a discount rate of 12%. (use table below for your workings in calculating the NPV)

Year	Discount factor at 12%	Net Cash Flows Equipment I	Present Value (PV) - Equipment I	Net Cash Flows Equipment II	Present Value (PV) - Equipment II
0 Initial Outlay
1
2
3
4
5