Newland Company is considering investing in one of two projects – A or B. The initial cost and net cash inflows from each project are shown below. The discount rate for both projects is 18% per cent.Cash FlowProject AProject B $$Initial Cost3,000,0003,500,000Net Cash Inflows Year 1800,0001,000,000Year 2800,0001,000,000Year 31,200,000700,000Year 41,200,000800,000Year 51,200,000800,000 YearFactor10.847520.718230.608640.515850.4371Discount factors for the projects @18% per annum are as follows: Required:Calculate the Accounting Rate of Return on average capital for each project. Calculate the net present value (NPV) for each project and identify the project in which the company should invest, giving ONE reason for your choice.

Introduction: Accounting rate of return: Accounting rate of return is calculated as under:…

Answered: Newland Company is considering…

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 3CMA

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Newland Company is considering investing in one of two projects – A or B. The initial cost and net cash inflows from each project are shown below. The discount rate for both projects is 18% per cent.

Cash Flow	Project A	Project B
	$	$
Initial Cost	3,000,000	3,500,000
Net Cash Inflows
Year 1	800,000	1,000,000
Year 2	800,000	1,000,000
Year 3	1,200,000	700,000
Year 4	1,200,000	800,000
Year 5	1,200,000	800,000

Year	Factor
1	0.8475
2	0.7182
3	0.6086
4	0.5158
5	0.4371

Discount factors for the projects @18% per annum are as follows:

Required:

Calculate the Accounting Rate of Return on average capital for each project.
Calculate the net present value (NPV) for each project and identify the project in which the company should invest, giving ONE reason for your choice.

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