Year Mini-scenario 2 The following information relates to a proposed four-year project which is being financially evaluated by the Board of Directors of Pampass Inc. (Pampass). Pampass is an unlisted company but shareholders include private investors, a venture capital company, an insurance company and a pension fund. The initial investment is $7.8 million, with scrap value of $0.2 million and the following net cash inflows for each of the four years: 2021 2022 2023 2024 Net operating cash flow ($m) 2.40 3.00 3.20 3.16 The Board of Directors believes that this project will increase shareholder wealth if it achieves an accounting rate of return (ARR) greater than 20%. As a matter of policy, the Board requires all investment projects to be evaluated using both ARR and payback period. Shareholders have recently criticised the Board of Directors for using these investment appraisal methods, claiming that Pampass should be using the net present value method. The directors' remuneration package includes a financial reward for achieving an ARR greater than 20% but does not include a share option scheme. Required: 1. What is the payback period of the proposed project? (2 marks) What is the average rate of return (ARR) of the proposed project? (2 marks) Which of the following statements about investment appraisal methods is/are not correct? ARR must be greater than the cost of equity if a project is to be accepted Riskier projects should be evaluated with longer payback periods The ARR method does not consider the time value of money (2 marks) 2. 3. A. B. C