Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The following 2 mutually exclusive projects (Project A and Project B) are available to Nandus Farm. They are producers of Sugar Cane. The initial cash

The following 2 mutually exclusive projects (Project A and Project B) are available to Nandus Farm. They are producers of Sugar Cane. The initial cash outlay and cash flows are shown below and Nandus will use straight line depreciation over each of the assets 4 year life and there will be no residual value on either investment.

Project A Project B
Initial outlay 235 000 80 000
Year/s Cash Flows (A) Cash Flows (B)
1 27 000 38 000
2 37 000 38 000
3 99 000 28 000
4 200 000 7 000

NB: The Company requires a minimum accounting rate of return of 25% on all its investments

It rigidly applies a payback period of no more than 3.5 years.

Their after tax cost of capital is 12%.

Applicable tax rate is 30%.

2.1 Which project is more lucrative if the payback rule is applied? (5)

2.2 Apply the Accounting Rate of Return (ARR) test. Which project is more viable? (8)

2.3 Determine which project is more lucrative if the NPV rule is applied. (8)

2.4 Which of the above projects will you recommend to Nandus. Explain in detail your choice of answer (by critically assessing each of the above calculations that you have made) (4)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management Principles And Practice

Authors: Timothy Gallagher

6th Edition

1930789157, 978-1930789159

More Books

Students also viewed these Finance questions

Question

Was it wrong for Lenny to ignore the other stakeholders ' wishes?

Answered: 1 week ago

Question

4. Describe cultural differences that influence perception

Answered: 1 week ago