Project A

Average investment$=(150,000+5,000)/2=77,500$

ARR$=(27,600/77,500)$ X $100=35\%$

Project B

Average investment$=(175,000+8,000)/2=91,500$

ARR$=(23,000/91,500)$ X $100=25\%$

Project C

Average investment$=(160,000+6,000)/2=83,000$

ARR$=(23,000/83,000)$ X $100=28\%$

Payback period

Project A Initial coast CF CCF

YO $(150,000)(150,000)(150,000)$

Y$155,000(95,000)$

Y$260,000(35,000)$

Y$365,00030,000$

Y$458,000$

Y$550,000$

PBP$=2+(35,000/65,$OOO$)=$

$2,6$ Years

Project B Initial coast CF CCF

Y$0(175,000)(175,000)(175,000)$

Y$185,000(90,000)$

Y$265,000(25,000)$

Y$345,00020,000$

Y$440,000$

Y$540,000$

PBP$=2+(25,000/45,000)=$

$2,6$ Years

Project C Initial coast CF CCF

Y$0(160,000)(160,000)(160,000)$

Y$145,000(115,000)$

Y$250,000(65,000)$

Y$360,000(5,000)$

Y$465,00060,000$

Y$555,000$

PBP$=3+(5,000/65,000)=$

$3,1$ Years

Net present value

Project A

Y Outlay CF DF $15\%$ PV

Y$0(150,000)(150,000)1(150,000)$

Y$155,0000,87047,850$

Y$260,0000,75645,360$

Y$365,0000,65842,770$

Y$458,0000,57233,176$

Y$550,0000,49724,850$

NPV$=44,006$

Project B

Y Outlay CF DF $15\%$ PV

Y$0(175,000)(175,000)1(175,000)$

Y$185,0000,87073,950$

Y$265,0000,75649,140$

Y$345,0000,65829,610$

Y$440,0000,57222,880$

Y$540,0000,49719,880$

NPV$=20,460$

Project C

Y Outlay CF DF $15\%$ PV

Y$0(160,000)(160,000)1(160,000)$

Y$145,0000,87039,150$

Y$250,0000,75637,800$

Y$360,0000,65839,480$

Y$465,0000,57237,180$

Y$555,0000,49727,335$

NPV$=20,945$

$2)$ Explain which of the three potential investment projects should be undertaken. Your explanation should be based on the results of your calculations in part $($a$)$