QUESTION 2

ZYC LTD has a cost of capital of 15% and is considering a capital investment project of 100,000, with no scrap value, where the estimated cash flows, depreciation and profits are as follows: Cash flows Depreciation Profits (after depreciation) Year 0 -100,000 - - Year 1 60,000 25,000 35,000 Year 2 80,000 25,000 55,000 Year 3 40,000 25,000 15,000 Year 4 30,000 25,000 5,000 Required

a) Calculate the accounting rate of return (ARR) based on initial investment

(b) Calculate the payback period (PBP) for the capital investment project

(c) Calculate the net present value (NPV) of the capital investment project

(d) Advise ZYC as to whether they should invest in the project (justify your advice by making specific reference to the ARR, PBP and NPV calculated)