ATS Ltd, a manufacturer of theatre sound equipment, is considering the selection of one from two mutually exclusive investment projects, each with an estimated five-year life. It can develop one of two types of soundboard and associated equipment, one is more advanced and can support a large number and type of sound inputs (referred to as the “Major” board project while the second is simpler and cheaper (the “Minor” board project. The Major board project requires initial investment of £1,500,000 and is forecast to generate annual cash flows of £428,000. Its estimated residual value after five years is £200,000. The Minor board project costs £500,000 with a forecast scrap value of £50,000. The Minor board should generate annual cash flows of £148,000. The company operates a straight-line depreciation policy and discounts cash flows at 15 per cent p.a. ATS Ltd uses four investment appraisal techniques: payback period, net present value, internal rate of return and accounting rate of return (i.e. average accounting profit to average value of investment). Make the appropriate calculations using each of these four methods and give your investment advice with reasons.

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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ATS Ltd, a manufacturer of theatre sound equipment, is considering the selection of one from two mutually exclusive investment projects, each with an estimated five-year life. It can develop one of two types of soundboard and associated equipment, one is more advanced and can support a large number and type of sound inputs (referred to as the “Major” board project while the second is simpler and cheaper (the “Minor” board project. The Major board project requires initial investment of £1,500,000 and is forecast to generate annual cash flows of £428,000. Its estimated residual value after five years is £200,000. The Minor board project costs £500,000 with a forecast scrap value of £50,000. The Minor board should generate annual cash flows of £148,000. The company operates a straight-line depreciation policy and discounts cash flows at 15 per cent p.a.

ATS Ltd uses four investment appraisal techniques: payback period, net present value, internal rate of return and accounting rate of return (i.e. average accounting profit to average value of investment).

Make the appropriate calculations using each of these four methods and give your investment advice with reasons.

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