Question 9

(a) Management of Allenby Ltd is considering the following investment project:

Capital outlay $200,000

Net Profit p.a. (before depreciation and tax) $ 90,000

Depreciation p.a. $ 40,000

Economic life 5 years

Salvage value Zero

Tax rate payable (paid in year of income) 30%

Required rate of return 12%

Required: Calculate the following:

1. The Net Profit After Tax for each year.
2. The Annual Cash Flow for each year.
3. Accounting Rate of Return (using total investment).
4. Payback Period.
5. Net Present Value.

(b) Evaluating projects on an Independent Basis (rather than Mutually Exclusive) and using NPV evaluation method would mean:

1. Choose the individual project with the highest NPV (Net Present Value).
2. Choose the individual project with the highest ARR.
3. Choose all projects with a positive NPV.
4. Choose all projects with an ARR greater than the W.A.C.C.