Question 1 You are the management accountant of Verstappen Ltd and have been asked to evaluate two projects the company is considering. Verstappen Ltd currently has a cost of capital of 9% and at the end of each project the scrap value will amount to 5% of its original cost. The cashflows from each project are expected to arise on the last day of each year as follows: Initial Cost Net Inflows Project A Project B 165,000 185,000 Year 1 60,000 55,000 Year 2 70,000 65,000 Year 3 60,000 65,000 Year 4 (excluding proceeds from sale of project) 40,000 42,000 You may use the following net present value table for your calculations: RATE 8% 9% 10% 11% 12% 13% 14% 15% 16% 25% YEAR 0 1 1 1 1 1 1 2 3 4 5 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.87 0.862 0.8 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.64 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.512 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.41 0.681 0.65 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.328 Required: (a) Calculate the payback period for each project and decide which project would be selected using this method. (6 marks) (b) Using a discount rate of 9% calculate the Net Present Value (NPV) of each project and decide which project would be selected using this method. (6 marks) (c) Calculate the Accounting Rate of Return (ARR) for each project and again decide which project would be selected using this method. (6.5 marks) (d) Which of the above three methods would you recommend to decide between the two projects and give reasons to support your recommendation. (4 marks) (e) Calculate the internal rate of return of project B only by using a discount rate 7% higher than the current rate. (7.5 marks) (Total marks for question 1: 30 marks) 2