TOowing information relates to two possible capital expenditure projects. Because o capital rationing only one project can be accepted.

Project B N$230 000

Initial cost Expected life Scrap value expected Expected cash inflows End year 1

Project A_ N$200 000 5 years N$10 000 N$

5 yearsS N$15 000 N$ 100 000

80 000 70 000 65 000

70 000D 2 50 000 3 50 0000 4

60 000

5

55 000 50 000

Notes: The company estimates its cost of capital is 18 per cent Cash inflow/profit is calculated after deducting straight line depreciation REQUIRED:

Marks 6

1.1. Calculate the Accounting rate of return for each project. 1.2. Calculate the Net present value of each project. 1.3.Calculate the payback period for each project. 1.4.

8 4 5

Explain the uses, limitations and merits of the payback period method for investment appraisal? 1.5. Explain which project you would recommend for acceptance.