QUESTION TWO New Territories Bowling Club is considering the selection of one mutually exclusive investment project - Project I or Project 2. The useful lives for both projects are 5 years. Use the straight line method for providing depreciation. Its cost of capital is 10%. Project 1: Purchase of a sport machine at a cost of $70,000. It will generate an annual cash flow (receipts less payments) of $20,000 Project 2: Establish a bowling facility at a cost of $170,000. It will generate an annual cash flow (receipts less payments) of $40,000. Required: 1) Calculate for each project the following and state which project you would select for acceptance. a) Accounting rate of return (8 marks) b) Payback period (6 marks) c) Net present value (8 marks) 2) Compute the internal rate of return for Project 1. What is your conclusion from this finding? (10 marks) 3) What are the financial and non-financial factors to be considered when selecting either to purchase a sport machine or to establish a bowling facility in the Club? (18 marks) Show workings Total for this question = 50 marks Appendix Present value IPVI of one dollar Annual interest rate () at % 10% 11% 128 1 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 2 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 3 0.840 0.816 0.794 0.751 0.864 0.823 0.772 0.708 0.731 0.659 0.712 0.636 4 0.792 0.763 0.735 0.683 5 0.784 0.747 0.681 0.621 0.593 0.567 0.713 0.666 0.650 0.596 0.746 0.705 0.630 0.564 0.535 0.507 7 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 8 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 9 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 10 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 Annual interest rate ) at 13% 15% 16% 17% 19% 20% 1 0.885 0.877 0.870 0.862 0.847 0.840 0.855 0.731 0.833 0.694 2 0.783 0.769 0.756 0.743 0.718 0.706 3 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.480 0.387 0.371 0.460 0.407 0.421 0.373 0.440 0.389 0.345 0.404 0.357 0.356 0.315 7 0.425 0.342 0.328 8 0.376 0.360 0.330 0.316 0.303 0.290 0.279 9 0.333 0.319 0.305 0.292 0.280 0.268 0.257 0.246 10 0.295 0.282 0.270 0.258 0.248 0.237 0.227 0.218 Present value 1 where is annual interest rate n = number of periods = n **** End of the Paper **** QUESTION TWO New Territories Bowling Club is considering the selection of one mutually exclusive investment project - Project I or Project 2. The useful lives for both projects are 5 years. Use the straight line method for providing depreciation. Its cost of capital is 10%. Project 1: Purchase of a sport machine at a cost of $70,000. It will generate an annual cash flow (receipts less payments) of $20,000 Project 2: Establish a bowling facility at a cost of $170,000. It will generate an annual cash flow (receipts less payments) of $40,000. Required: 1) Calculate for each project the following and state which project you would select for acceptance. a) Accounting rate of return (8 marks) b) Payback period (6 marks) c) Net present value (8 marks) 2) Compute the internal rate of return for Project 1. What is your conclusion from this finding? (10 marks) 3) What are the financial and non-financial factors to be considered when selecting either to purchase a sport machine or to establish a bowling facility in the Club? (18 marks) Show workings Total for this question = 50 marks Appendix Present value IPVI of one dollar Annual interest rate () at % 10% 11% 128 1 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 2 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 3 0.840 0.816 0.794 0.751 0.864 0.823 0.772 0.708 0.731 0.659 0.712 0.636 4 0.792 0.763 0.735 0.683 5 0.784 0.747 0.681 0.621 0.593 0.567 0.713 0.666 0.650 0.596 0.746 0.705 0.630 0.564 0.535 0.507 7 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 8 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 9 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 10 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 Annual interest rate ) at 13% 15% 16% 17% 19% 20% 1 0.885 0.877 0.870 0.862 0.847 0.840 0.855 0.731 0.833 0.694 2 0.783 0.769 0.756 0.743 0.718 0.706 3 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.480 0.387 0.371 0.460 0.407 0.421 0.373 0.440 0.389 0.345 0.404 0.357 0.356 0.315 7 0.425 0.342 0.328 8 0.376 0.360 0.330 0.316 0.303 0.290 0.279 9 0.333 0.319 0.305 0.292 0.280 0.268 0.257 0.246 10 0.295 0.282 0.270 0.258 0.248 0.237 0.227 0.218 Present value 1 where is annual interest rate n = number of periods = n **** End of the Paper ****