Investapp Ltd is considering whether to undertake one of two mutually exclusive projects, each of which would require the purchase of an asset costing £50,000, which would have a zero scrap value at the end of four years. Cost of capital is estimated at 10%. The cash flows associated with the two projects are as follows: Project X £ Project Y 50,000 50,000 Initial investment Net cash inflows: 40,000 30,000 20,000 20,000 Year 1 Year 2 30,000 20,000 30,000 30,000 Year 3 Year 4 Discount factors @ 10% Rate 10% Year 1.000 1 0.909 2 0.826 3 0.751 4 0.683 Required: For both projects: a) Calculate the (non-discounted) Payback Period. b) Calculate the Accounting Rate of Return (ARR) using initial investment c) Calculate the Net Present Value (NPV).
Investapp Ltd is considering whether to undertake one of two mutually exclusive projects, each of which would require the purchase of an asset costing £50,000, which would have a zero scrap value at the end of four years. Cost of capital is estimated at 10%. The cash flows associated with the two projects are as follows: Project X £ Project Y 50,000 50,000 Initial investment Net cash inflows: 40,000 30,000 20,000 20,000 Year 1 Year 2 30,000 20,000 30,000 30,000 Year 3 Year 4 Discount factors @ 10% Rate 10% Year 1.000 1 0.909 2 0.826 3 0.751 4 0.683 Required: For both projects: a) Calculate the (non-discounted) Payback Period. b) Calculate the Accounting Rate of Return (ARR) using initial investment c) Calculate the Net Present Value (NPV).
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 10E: Roberts Company is considering an investment in equipment that is capable of producing more...
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