Palestine PLC has recently raised 350000 from a rights issue and the director are considering three ways of using these funds. Three projects ( A,B and C) are being considerd, each involving the immediate purchase of equipment costing 350000. One project only can be undertaken and the equibment for eash project will have a useful life equal to that of the project with no scrap value stadler favours project (C) because it is expected to show the highest accounting profit in the third year however he does not wish to reveal his real reasons for favouring project (C) and so in his report to the chairman he recommends project (C) because it shows the highest internal rate of return the following summary is taken from his report: 0 6 7 8 Project A Net cash flow ( 000) 2 3 4 110 104 112 100 210 260 150 240 40 160 1 100 40 200 5 138 160 -350 -350 -350 180 IRR % 27.5 26.4 33.3 B The chairman of the company is accustomed to projects being appraised in terms of pay-back and accounting rate of return and he is consequently suspicious of the use of internal rate of return as a method of project selection accordingly the chairman has asked for an independent report on the choice of project the company's cost of capital is 20% and a policy of straight-line depreciation is used to write off the cost of equipment in the financial statements. Requirements: (A). calculate the payback period for each project. (B). calculate the accounting rate of return for each project. (C). prepare a report for the chairman with supporting calculations indicating which project should be preferred by the ordinary shareholders of Palestine plc. (D). discuss the assumptions about the reactions of the stock market that are implicit in Stadler's choice of project D. Note : Ignore taxation Palestine PLC has recently raised 350000 from a rights issue and the director are considering three ways of using these funds. Three projects ( A,B and C) are being considerd, each involving the immediate purchase of equipment costing 350000. One project only can be undertaken and the equibment for eash project will have a useful life equal to that of the project with no scrap value stadler favours project (C) because it is expected to show the highest accounting profit in the third year however he does not wish to reveal his real reasons for favouring project (C) and so in his report to the chairman he recommends project (C) because it shows the highest internal rate of return the following summary is taken from his report: 0 6 7 8 Project A Net cash flow ( 000) 2 3 4 110 104 112 100 210 260 150 240 40 160 1 100 40 200 5 138 160 -350 -350 -350 180 IRR % 27.5 26.4 33.3 B The chairman of the company is accustomed to projects being appraised in terms of pay-back and accounting rate of return and he is consequently suspicious of the use of internal rate of return as a method of project selection accordingly the chairman has asked for an independent report on the choice of project the company's cost of capital is 20% and a policy of straight-line depreciation is used to write off the cost of equipment in the financial statements. Requirements: (A). calculate the payback period for each project. (B). calculate the accounting rate of return for each project. (C). prepare a report for the chairman with supporting calculations indicating which project should be preferred by the ordinary shareholders of Palestine plc. (D). discuss the assumptions about the reactions of the stock market that are implicit in Stadler's choice of project D. Note : Ignore taxation