Question
The following information relates to two possible capital projects of which you have to select one to invest in. Both projects have an initial capital
The following information relates to two possible capital projects of which you have to select one to invest in. Both projects have an initial capital cost of $210,000 and only one can be undertaken.
Projects | X | Y |
Expected profits | $ | $ |
Year 1 | 85,000 | 35,000 |
Year 2 | 70,000 | 50,000 |
Year 3 | 40,000 | 90,000 |
Year 4 | 20,000 | 120,000 |
Estimated resale value at the end of the year 4 | 40,000 | 40,000 |
Note: Profit is calculated after deducting straight line depreciation.
The cost of capital is 16%
Year | 1 | 2 | 3 | 4 |
16% | 0.862 | 0.743 | 0.641 | 0.553 |
Required:
a) For both projects calculate the following:
(i) Payback period to one decimal place.
(ii) The accounting rate of return using average investment
(iii) The net present value
b) Advise the board which project in your opinion should be undertaken, giving reasons for your decision.
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