The directors of Yorkshire Autopoints are considering the acquisition of an automatic car-washing installation. The initial cost and setting-up expenses will amount to about £140,000. Its estimated life is about seven years, and estimated annual accounting profit is as follows:

At the end of its seven-year life, the installation will yield only a few pounds in scrap value. The company classifies its projects as follows:
Required rate of return
Low risk ..........................20 per cent
Average risk .....................30 per cent
High risk .........................40 per cent
Car-washing projects are estimated to be of average risk.
(a) Should the car-wash be installed?
(b) List some of the popular errors made in assessing capital projects.

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Year Operations cash flow() 30,000 50,000 60,000 60,000 30,000 20,000 20,000 Depreciation (E) Accounting profit (E) 20,000 20,000 20,000 20,000 20,000 20,000 20,000 10,000 30,000 40,000 40,000 10,000