The following data are supplied relating to two investment projects, only one of which may be selected:

Project A project B

( ) ()

Initial Capital expenditure 50,000 50,000

Profit (loss) year 1 25,000 10,000

2 20,000 10,000

3 15,000 14,000

4 10,000 26,000

Estimated resale value at end of year 4 10,000 10,000

Notes:

1. Profit is calculated after deducting straight-line depreciation.
2. The Cost of Capital is 10 per cent.

Required:

1. Calculate for each project:

1. average annual rate of return on average Capital invested;
2. payback period;
3. net present value.

2. Briefly discuss the relative merits of the three methods of evaluation mentioned in (a) above.

3. explain which project you would recommend for acceptance.