Q56

The Elvira (Ghana) Limited contemplating three available investment opportunities, the cash flows of which are given below

Initial Cash flow

Investment Year 1 Year 2 Year 3 Year 4 Year 5

GHS GHS GHS GHS GHS GHS

Project Adina (100) 40 40 40 40

Project Belcore (120) 10 10 10 10 200

Project Calisto (150) 100 80

In each case the initial investment represents the purchase of plant and machinery, whose realisable value will be 10% of initial cost, receivable in addition to the above flow at the end of the life of the project.

Required:

Advise the company on which project it should prefer, taking as your investment criterion the following alternative measures.

a) Payback period

b) Accounting rate of return (based on average investment)

c) Net present value at 15%

d) Internal rate of return