Calculate the Payback Period of Project A (expressed in years, months and days)Calculate the Accounting Rate of Return on average investment of Project A (expressedto two decimal places).Calculate the Benefit Cost Ratio of both projects (expressed to two decimal places).Which project should be chosen? Why?Calculate the Internal Rate of Return of Project B (expressed to two decimal places). Youranswer must include two net present value calculations (using consecutiverates/percentages) and interpolation. INFORMATIONThe following information relates to two capital expenditure projects. Because of capital rationing, only oneproject can be chosen.Initial costExpected useful lifeExpected scrap valueDepreciation per yearExpected net profit:End of year12345The company estimates that its cost of capital is 12%. Ignore taxes.Project AR900 0005 yearsR100 000R160 000R100 000140 000150 000120 00050 000Project BR900 0005 years0R180 000R90 00090 00090 00090 00090 000

Accounting rate of return (ARR) and benefit to cost ratio are calculated as shown below.

Answered: Calculate the Payback Period of Project…

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter15: Capital Investment Analysis

Section: Chapter Questions

Problem 15.21E

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Net present value method, internal rate of return method, and analysis for a service company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: The wind turbines require an investment of 887,600, while the biofuel equipment requires an investment of 911,100. No residual value is expected from either project. Instructions 1. Compute the following for each project: A. The net present value. Use a rate of 6% and the present value of an annuity table appearing in Exhibit 5 of this chapter. B. A present value index. (Round to two decimal places.) 2. Determine the internal rate of return for each project by (A) computing a present value factor for an annuity of 1 and (B) using the present value of an annuity of 1 table appearing in Exhibit 5 of this chapter. 3. What advantage does the internal rate of return method have over the net present value method in comparing projects?
Cost of Capital, Net Present Value Leakam Companys product engineering department has developed a new product that has a 3-year life cycle. Production of the product requires development of a new process that requires a current 100,000 capital outlay. The 100,000 will be raised by issuing 60,000 of bonds and by selling new stock for 40,000. The 60,000 in bonds will have net (after-tax) interest payments of 3,000 at the end of each of the 3 years, with the principal being repaid at the end of Year 3. The stock issue carries with it an expectation of a 17.5% return, expressed in the form of dividends at the end of each year (with 7,000 in dividends expected for each of the next 3 years). The sources of capital for this investment represent the same proportion and costs that the company typically has. Finally, the project will produce after-tax cash inflows of 50,000 per year for the next 3 years. Required: 1. Compute the cost of capital for the project. (Hint: The cost of capital is a weighted average of the two sources of capital, where the weights are the proportion of capital from each source.) 2. CONCEPTUAL CONNECTION Compute the NPV for the project. Explain why it is not necessary to subtract the interest payments and the dividend payments and appreciation from the inflow of 50,000 in carrying out this computation.

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