Question 3 A company is considering investing in three projects A, B and C with initial investment of $1,200 and a life of 5 years. The following table indicates the profits that are estimated from each project: After Tax & Depreciation Profits Year Project A Project B Project C 1 300 300 450 2 300 200 450 3 300 400 350 4 300 350 100 5 300 350 100 Total 1,500 1,600 1,450 Required: Calculate the Accounting Rate of Return on initial capital for each project. Calculate the Accounting Rate of Return on average capital for each project. Assuming that financing is available outline three (3) major factors which will influence the investor’s decision to invest. State two (2) drawbacks of the Accounting Rate of Return method of project appraisal.
Question 3 A company is considering investing in three projects A, B and C with initial investment of $1,200 and a life of 5 years. The following table indicates the profits that are estimated from each project: After Tax & Depreciation Profits Year Project A Project B Project C 1 300 300 450 2 300 200 450 3 300 400 350 4 300 350 100 5 300 350 100 Total 1,500 1,600 1,450 Required: Calculate the Accounting Rate of Return on initial capital for each project. Calculate the Accounting Rate of Return on average capital for each project. Assuming that financing is available outline three (3) major factors which will influence the investor’s decision to invest. State two (2) drawbacks of the Accounting Rate of Return method of project appraisal.
Chapter11: The Cost Of Capital
Section: Chapter Questions
Problem 18PROB
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Question 3
A company is considering investing in three projects A, B and C with initial investment of $1,200 and a life of 5 years. The following table indicates the profits that are estimated from each project:
After Tax &
|
Year |
Project A |
Project B |
Project C |
|
1 |
300 |
300 |
450 |
|
2 |
300 |
200 |
450 |
|
3 |
300 |
400 |
350 |
|
4 |
300 |
350 |
100 |
|
5 |
300 |
350 |
100 |
|
Total |
1,500 |
1,600 |
1,450 |
Required:
- Calculate the Accounting
Rate of Return on initial capital for each project. - Calculate the Accounting Rate of Return on average capital for each project.
- Assuming that financing is available outline three (3) major factors which
will influence the investor’s decision to invest.
State two (2) drawbacks of the Accounting Rate of Return method of project
appraisal.
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