Rocky Red Ltd has provided the following figures for two investment projects, only one of which may be chosen. Rocky Red Ltd has provided the following figures for two investment projects, only one of which may be chosen. Project Alpha Project Beta Initial outlay £200,000 £180,000 Profit for the year 1 £80,000 £10,000 2 £60,000 £10,000 3 £40,000 £30,000 4 £30,000 £25,000 Estimated value at the end of year 4 £10,000 £5,000 Profit is calculated after deducting straight line depreciation. The business has a cost of capital of 15%. Payback for project A has been calculated as follows: Payback period Project Alpha Cash flow Cumulative cash flow year 0 -200,000 -200,000 -200,000 year 1 80,000 127,500 -72,500 year 2 60,000 107,500 35,000 year 3 40,000 87,500 122,500 year 4 30,000 77,500 200,000 In years: Payback period =(72500/107,500)+1year= 1.67 years Depreciation = (200,000-10,000)/4=47500 Given the answer/calculations above please describe step by step how they have been calculated. - for example Where the cash flow amounts come from.
Rocky Red Ltd has provided the following figures for two investment projects, only one of which may be chosen.
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Rocky Red Ltd has provided the following figures for two investment projects, only one of which may be chosen. |
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Project Alpha |
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Project Beta |
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Initial outlay |
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£200,000 |
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£180,000 |
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Profit for the year |
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£80,000 |
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£10,000 |
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£60,000 |
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£10,000 |
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£40,000 |
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£30,000 |
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4 |
£30,000 |
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£25,000 |
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Estimated value at the end of year 4 |
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£10,000 |
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£5,000 |
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Profit is calculated after deducting straight line |
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Payback for project A has been calculated as follows:
Payback period
Project Alpha
| Cash flow | Cumulative cash flow | ||||
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year 0 |
-200,000 | -200,000 | -200,000 | ||
| year 1 | 80,000 | 127,500 | -72,500 | ||
| year 2 | 60,000 | 107,500 | 35,000 | ||
| year 3 | 40,000 | 87,500 | 122,500 | ||
| year 4 | 30,000 | 77,500 | 200,000 |
In years:
Payback period =(72500/107,500)+1year= 1.67 years
Depreciation = (200,000-10,000)/4=47500
Given the answer/calculations above please describe step by step how they have been calculated. - for example Where the cash flow amounts come from.
Step by step
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