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:

1. Calculate the payback period for each project to the nearest year and month.

2. Calculate the Accounting Rate of Return(ARR) to the nearest %foreach project using the average profit and average investment.

3. Calculate the Net Present Value(NPV) of each project to the nearest.

4. Which project would you advise Steakhouse to accept? Explain your reasoning and outline any other factors which may be relevant in making your decision.

Initial cost Expected life (years) Scrap (residual) value Fred 49,600 5 5,020 Wilma 119,500 4 5,500 Expected cash flows Year 1 2 3 4 5 26,000 11,000 -5,000 11,000 24,000 55,000 35,000 32,000 23,000 0