Salalah Chemical Company is considering two proposals for long term investment. Both will operate for 5 years, but due to limitation on capital the company can accept only one out two projects. The following information is available relating to : Initial investmentMethanol project Fertilizer Project RORO(100,000)(100,000)Operating Profit before depreciation year 160,00054,000Operating Profit before depreciation year 250,00046,000Operating Profit before depreciation year 340,00040,000Operating Profit before depreciation year 430,00036,000Operating Profit before depreciation year 525,00025,000Scrap value at the end of 5 years10,00010,000 The company’s standard payback period is 2.5 years and standard ARR is 12%. The cost of capital is 10%? Required: A)Calculate Accounting Rate of Return for both Methanol and Fertilizer project.B)Calculate Payback Period of Project Methanol and Fertilizer.C)Calculate the NPV of Methanol and Fertilizer project. Year 12345PV Factor @ 10%0.9090.8260.7510.6830.621

Calculation of ARR (Accounting Rate of Return) for project Methanol and project Fertilizer is shown…

Answered: Salalah Chemical Company is considering…

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

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Salalah Chemical Company is considering two proposals for long term investment. Both will operate for 5 years, but due to limitation on capital the company can accept only one out two projects. The following information is available relating to :

Initial investment	Methanol project	Fertilizer Project
RO	RO
(100,000)	(100,000)
Operating Profit before depreciation year 1	60,000	54,000
Operating Profit before depreciation year 2	50,000	46,000
Operating Profit before depreciation year 3	40,000	40,000
Operating Profit before depreciation year 4	30,000	36,000
Operating Profit before depreciation year 5	25,000	25,000
Scrap value at the end of 5 years	10,000	10,000

The company’s standard payback period is 2.5 years and standard ARR is 12%. The cost of capital is 10%?

Required:

A)Calculate Accounting Rate of Return for both Methanol and Fertilizer project.

B)Calculate Payback Period of Project Methanol and Fertilizer.

C)Calculate the NPV of Methanol and Fertilizer project.

Year	1	2	3	4	5
PV Factor @ 10%	0.909	0.826	0.751	0.683	0.621

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