Keane & Co plc is considering two possible investments. The company requires anAccounting Rate of Return of 12% and payback within 2 years. It has a cost ofcapital of 12%.Forecast sales and production unitsYear 1Year 2Year 3Year 4Contribution per unitFixed cost per yearInitial investmentResidual (scrap) valueAccounting Rate of ReturnInternal Rate ReturnDiscount factors at 12% are:Year 1Year 2Year 3Year 4Year 50.8930.7970.7120.6360.567Project J60,000110,00080,00050,000£40£800,000£7,600,000£300,0009.5%8%Project K30,00024,00020,00012,000£120£700,000£5,500,000£150,00019%18% Calculate operating cash flows.Calculate the payback period for each project toCalculate the net present value for each project,£.

Operating cash flow :— It is the amount of annual cash inflow of the project. Payback period :—…

Answered: Calculate operating cash flows.…

Calculate operating cash flows. Calculate the payback period for each project to Calculate the net present value for each project, £.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 5PA: Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated...

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Keane & Co plc is considering two possible investments. The company requires an
Accounting Rate of Return of 12% and payback within 2 years. It has a cost of
capital of 12%.
Forecast sales and production units
Year 1
Year 2
Year 3
Year 4
Contribution per unit
Fixed cost per year
Initial investment
Residual (scrap) value
Accounting Rate of Return
Internal Rate Return
Discount factors at 12% are:
Year 1
Year 2
Year 3
Year 4
Year 5
0.893
0.797
0.712
0.636
0.567
Project J
60,000
110,000
80,000
50,000
£40
£800,000
£7,600,000
£300,000
9.5%
8%
Project K
30,000
24,000
20,000
12,000
£120
£700,000
£5,500,000
£150,000
19%
18%

Calculate operating cash flows.
Calculate the payback period for each project to
Calculate the net present value for each project,
£.

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