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sm A company is considering two capital expenditure proposals. Both proposals are for similar products and both are expected to operate for four years. Only
sm A company is considering two capital expenditure proposals. Both proposals are for similar products and both are expected to operate for four years. Only one proposal can be accepted. The following information is available. Depreciation is charged on the straight line basis. Inflation is expected to run at the rate of 7% per annum. The machinery would attract writing down allowances of 25% on the reducing balance basis which could be claimed against taxable profits of the current year, which is soon to end. The rate of corporation tax is 30%. The company estimates its cost of capital at 15% pa. Required: Using the real rate calculate the internal rate of return (IRR) for each of the two proposals and advise which project should be adopted. (35 Marks)
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