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Question 2 The following information relates to three possible capital expenditure projects. Because of capital rationing, only one project can be accepted: P Project
Question 2 The following information relates to three possible capital expenditure projects. Because of capital rationing, only one project can be accepted: P Project Q R Initial cost 250,000 210,000 190,000 Expected life (years) 5 4 5 Scrap value expected 20,000 17,500 12,000 Expected cash inflows End of year 1 75,000 90,000 60,000 2 70,000 70,000 65,000 3 65,000 55,000 70,000 4 60,000 80,000 75,000 5 55,000 80000 The company estimates its cost of capital is 14 per cent. Required: Calculate a) The payback period for each project. (7 marks) b) The accounting rate of return for each project. c) The net present value of each project. d) Which project should be accepted-give reasons. (6 marks) (12 marks) (4 marks) e) Explain the factors management would need to consider, in addition to the financial factors, before making a final decision on a project. (4 marks) Total (33 marks)
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