The Finance Director of Black & White Plc is evaluating a project with the following cash flows:

Year Project Beta

Initial (600,000)

1 150,000

2 150,000

3 150,000

4 300,000

5 165,000

The companys cost of capital is 10 per cent and both investment projects have zero scrap value. Its current return on capital employed is 14 per cent and the company uses straight-line depreciation over the life of projects.

Required:

a) Make the following calculations:

(i) The payback method of investment appraisal is used. (ii) The net present value method of investment appraisal is used. (iii) The internal rate of return method of investment appraisal is used. (iv) The accounting rate of return method of investment appraisal is used. (10 marks)

b) State Two benefits and Two limitations of the Accounting Rate of Return (ARR)

(4 marks) (10 marks) (12 marks)

method.

(4 marks) (Total 40 marks)