Question
Steakhouse Ltd is considering two mutually exclusive investment projects. Details of the two projects and their expected cash flows are as follows: Note that all
Steakhouse Ltd is considering two mutually exclusive investment projects. Details of the two projects and their expected cash flows are as follows:
Note that all the expected cash flows are positive cash inflows with the exception of year 3 for Fred, which is a negative cash outflow. The company accountant has calculated the Internal Rate of Return (IRR) for the Fred and Wilma projects and found an IRR of 13.7% and 11.2% respectively. Since the IRR for Fred is higher and in excess of Steakhouses 8% cost of capital, the accountant has recommended proceeding with project Fred.
Required:
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Calculate the payback period for each project to the nearest year and month.
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Calculate the Accounting Rate of Return(ARR) to the nearest %foreach project using the average profit and average investment.
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Calculate the Net Present Value(NPV) of each project to the nearest.
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Which project would you advise Steakhouse to accept? Explain your reasoning and outline any other factors which may be relevant in making your decision.
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