Question 1

The following information has been supplied by Burgess Limited to evaluate which proposal

would be more beneficial.

Proposal A Proposal B

Purchase cost $300 000 $375 000

Expected life 5 years 5 Years

Scrap value Nil Nil

Purchase date Now Now

Depreciation Straight Straight

Net profit before tax $95 000 $104 000

and depreciation

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Additional information:

i) Company tax rate is 30% payable at the end of the year.

ii) Cost of capital is 10% after tax.

Required:

a) Calculate the payback period, IRR and Net Present Value for both proposals.

b) Recommend whether or not to accept the proposal and provide the reasons.