d. Explain why NPV is considered technically superior to Payback and Accounting Rate of Return (ARR) as an investment appraisal technique even though the latter are said to be easier to understand by management.
d. Explain why NPV is considered technically superior to Payback and Accounting Rate of Return (ARR) as an investment appraisal technique even though the latter are said to be easier to understand by management.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:d.
Explain why NPV is considered technically superior to Payback and Accounting Rate of
Return (ARR) as an investment appraisal technique even though the latter are said to be
easier to understand by management.
Transcribed Image Text:Gemilang Berhad is considering which of two mutually exclusive projects it should undertake
as its investment in the month of February 2019. The finance director thinks that the project
with the higher Net Present Value (NPV) should be chosen whereas the managing director
thinks that the one with the shorter payback period should be taken. As a management
accountant, you are given with the followings projected profit:
Project
Initial cost
AA (RM)
(70,000)
15,000
ZZ (RM)
(60,000)
Year 1
20,000
Year 2
18,000
25,000
Year 3
20,000
32,000
18,000
Year 4
Year 5
Notes:
All cash flows take place at the end of the year apart from the original investment in the
project which takes place at the beginning of the project.
1.
Project AA machinery is to be disposed of at the end of year 5 with a scrap value of
RM10,000.
2.
3.
Project ZZ machinery is to be disposed at the end of year 3 with a nil scrap value.
4.
Gemilang Berhad's policy is to depreciate its assets on a straight line basis.
5.
The discount rate to be used by Gemilang Berhad is 14%.
Year
1
2
3
4
PVIF discount factor
0.877
0.769
0.675
0.592
0.519
Required:
Compute the Payback period for Project AA and ZZ taking into consideration for all the
notes above.
а.
b.
Compute the Net Present Value (NPV) for Project AA and ZZ taking into consideration
for all the notes above.
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