Question

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.

                                                                                                               

                                                               

Answer 1