QUESTION ONE

John & Kelly Inc, a medium-size listed company raised 1,000,000 from the capital market, aiming to invest in a lucrative project. The Chief Executive Officer (CEO) is currently considering the following three projects, each requires the purchase of equipment. Only one project can be undertaken for investment.

	Project
	X	Y	Z
Initial investment	950,000	900,000	1,000,000
Useful life	5 years	5 years	5 years
Expected scarp value	10,000	5,000	20,000
Expected net cash flows
End of year 1	350,000	320,000	400,000
2	320,000	290,000	320,000
3	280,000	270,000	280,000
4	250,000	220,000	240,000
5	180,000	200,000	200,000

The CEO asks Sasha Malik, a young and ambitious executive who has recently been appointed to the Chief Financial Officer (CFO) to evaluate these projects and recommend the best project to invest. Sasha considers this appointment as an opportunity to gain experience and enough knowledge before she moves to a Fortune 500 companies in five years. To achieve her ambition, in her report, she recommends project X to invest without providing any credible explanation. The CEO finds the report unusual because she is accustomed to evaluating a project based on the payback period, accounting rate of return, net present value, and internal rate of return. She becomes more suspicious; thus, she appoints an independent analyst to do all the relevant calculation and write a report suggesting the best project to invest. John & Kelly Inc follow straight-line depreciation and tries to maintain a 15% cost of capital.

Required:

1. Compute the payback period for each project. (6 Marks)
2. Compute the accounting rate of return for each project. (9 Marks)
3. Compute the net present value (NPV) for each project. (12 Marks)
4. Compute the internal rate of return (IRR) for each project. (9 Marks)