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Question 4 BOOT Ltd Summer 2010 (Q 1) BOOT Lid (BOOT), a drug manufacturer, is considering two mutually exclusive investment projects. Both projects involve the
Question 4 BOOT Ltd Summer 2010 (Q 1) BOOT Lid ("BOOT"), a drug manufacturer, is considering two mutually exclusive investment projects. Both projects involve the purchase of new production machinery with an estimated five-year life. The following data are avaliable for each project. The company is liable to corporation tax of 15% payable at the end of each current year. The machinery qualifies for tax capital allowances as follows: The company operates a straight line depreciation policy, and discounts cash flows at 14% per annum. Requirement (a) Calculate for each project: (i) The accounting rate of rotum (average profit: initial cost of investment). (ii) The simple (undiscounled) payback period. 4 Marks (iii) The net present value at 14% discount. 3 Marks 4 Marks (b) Indicate, with reasons which, if any, of the lwo projects the directors should accept. 2 Marks (c) Outline briefly the relative advantages of the above three methods of investment appraisal. 7 Marks
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