There are four main methods of investment appraisal: Accounting Rate ofReturn, Payback, Net Present Value and Internal Rate of Return. Criticallyevaluate each method and briefly discuss their advantages anddisadvantages. Keane & Co plc is considering two possible investments. The company requires anAccounting Rate of Return of 12% and payback within 2 years. It has a cost ofcapital of 12%.Forecast sales and production unitsYear 1Year 2Year 3Year 4Contribution per unitFixed cost per yearInitial investmentResidual (scrap) valueAccounting Rate of ReturnInternal Rate ReturnDiscount factors at 12% are:Year 1Year 2Year 3Year 4Year 50.8930.7970.7120.6360.567Project J60,000110,00080,00050,000£40£800,000£7,600,000£300,0009.5%8%Project K30,00024,00020,00012,000£120£700,000£5,500,000£150,00019%18%

Capital budgeting: A business uses capital budgeting as a tool to assess potential big projects or…

Answered: Keane & Co plc is considering two…

Keane & Co plc is considering two possible investments. The company requires an Accounting Rate of Return of 12% and payback within 2 years. It has a cost of capital of 12%.

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 1BE: Average rate of return Determine the average rate of return for a project that is estimated to yield...

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

There are four main methods of investment appraisal: Accounting Rate of
Return, Payback, Net Present Value and Internal Rate of Return. Critically
evaluate each method and briefly discuss their advantages and
disadvantages.

Keane & Co plc is considering two possible investments. The company requires an
Accounting Rate of Return of 12% and payback within 2 years. It has a cost of
capital of 12%.
Forecast sales and production units
Year 1
Year 2
Year 3
Year 4
Contribution per unit
Fixed cost per year
Initial investment
Residual (scrap) value
Accounting Rate of Return
Internal Rate Return
Discount factors at 12% are:
Year 1
Year 2
Year 3
Year 4
Year 5
0.893
0.797
0.712
0.636
0.567
Project J
60,000
110,000
80,000
50,000
£40
£800,000
£7,600,000
£300,000
9.5%
8%
Project K
30,000
24,000
20,000
12,000
£120
£700,000
£5,500,000
£150,000
19%
18%

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