A company is considering investing in one of two projects for a period of three years. Information relating to both projects is shown below. Project A (000) Project B (000) Initial cost 390 690 Accounting Net Profit (this profit includes depreciation) Year 1 120 200 Year 2 230 320 Year 3 160 320 Residual Value at the end of 3 years 150 240 All assets are depreciated on a straight-line basis. The company’s cost of capital is 20% per annum. The following discount table is provided. Periods 8% 10% 12% 15% 20% 25% 1 0.926 0.909 0.893 0.870 0.833 0.8000 2 0.857 0.826 0.797 0.756 0.694 0.6400 3 0.794 0.751 0.712 0.658 0.579 0.5120 4 0.735 0.683 0.636 0.572 0.482 0.4096 5 0.681 0.621 0.567 0.497 0.402 0.3277 Required: (a) Calculate annual cashflow for Project A and Project B. (b) Where applicable, using annual cashflow in (a) for each project (i) Payback period (ii) accounting rate of return (iii) net present value (iv) Internal rate of return (c) As per your calculations above, comment on the which project is most suitable. You must comment on the project to be accepted under each method and make an overall conclusion.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 6CE

See similar textbooks

Related questions

Question

A company is considering investing in one of two projects for a period of three years. Information relating to both projects is shown below.

	Project A (000)	Project B (000)
Initial cost	390	690
Accounting Net Profit (this profit includes depreciation)
Year 1	120	200
Year 2	230	320
Year 3	160	320
Residual Value at the end of 3 years	150	240

All assets are depreciated on a straight-line basis. The company’s cost of capital is 20% per annum.

The following discount table is provided.

Periods	8%	10%	12%	15%	20%	25%
1	0.926	0.909	0.893	0.870	0.833	0.8000
2	0.857	0.826	0.797	0.756	0.694	0.6400
3	0.794	0.751	0.712	0.658	0.579	0.5120
4	0.735	0.683	0.636	0.572	0.482	0.4096
5	0.681	0.621	0.567	0.497	0.402	0.3277

Required:

(a) Calculate annual cashflow for Project A and Project B.

(b) Where applicable, using annual cashflow in (a) for each project

(i) Payback period

(ii) accounting rate of return

(iii) net present value

(iv) Internal rate of return

(c) As per your calculations above, comment on the which project is most suitable. You must comment on the project to be accepted under each method and make an overall conclusion.

Expert Solution