Newland Company is considering investing in one of two projects – A or B. The initial cost and net cash inflows from each project are shown below. The discount rate for both projects is 18% per cent. Cash Flow Project A Project B $ $ Initial Cost 3,000,000 3,500,000 Net Cash Inflows Year 1 800,000 1,000,000 Year 2 800,000 1,000,000 Year 3 1,200,000 700,000 Year 4 1,200,000 800,000 Year 5 1,200,000 800,000 Year Factor 1 0.8475 2 0.7182 3 0.6086 4 0.5158 5 0.4371 Discount factors for the projects @18% per annum are as follows: Required: Calculate the payback period for each project and identify the project in which the company should invest, giving ONE reason for your choice. Calculate the Accounting Rate of Return on initial capital for each project
Newland Company is considering investing in one of two projects – A or B. The initial cost and net cash inflows from each project are shown below. The discount rate for both projects is 18% per cent. Cash Flow Project A Project B $ $ Initial Cost 3,000,000 3,500,000 Net Cash Inflows Year 1 800,000 1,000,000 Year 2 800,000 1,000,000 Year 3 1,200,000 700,000 Year 4 1,200,000 800,000 Year 5 1,200,000 800,000 Year Factor 1 0.8475 2 0.7182 3 0.6086 4 0.5158 5 0.4371 Discount factors for the projects @18% per annum are as follows: Required: Calculate the payback period for each project and identify the project in which the company should invest, giving ONE reason for your choice. Calculate the Accounting Rate of Return on initial capital for each project
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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Newland Company is considering investing in one of two projects – A or B. The initial cost and net
|
Cash Flow |
Project A |
Project B |
|
|
$ |
$ |
|
Initial Cost |
3,000,000 |
3,500,000 |
|
Net Cash Inflows |
|
|
|
Year 1 |
800,000 |
1,000,000 |
|
Year 2 |
800,000 |
1,000,000 |
|
Year 3 |
1,200,000 |
700,000 |
|
Year 4 |
1,200,000 |
800,000 |
|
Year 5 |
1,200,000 |
800,000 |
|
Year |
Factor |
|
1 |
0.8475 |
|
2 |
0.7182 |
|
3 |
0.6086 |
|
4 |
0.5158 |
|
5 |
0.4371 |
Discount factors for the projects @18% per annum are as follows:
Required:
- Calculate the payback period for each project and identify the project in which the company should invest, giving ONE reason for your choice.
- Calculate the Accounting
Rate of Return on initial capital for each project
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