Question 1 Grey Ltd has provided the following figures for two investment projects, only one of which may be chosen. Project X Project Y Initial outlay 200,000 180,000 Profit for year 1 65,000 35,000 65,000 35,000 75,000 65,000 4 35,000 85,000 Estimated resale value at end of year 4 60,000 40,000 Profit is calculated after deducting straight line depreciation. The business has a cost of capital of 10%. Required a) Calculate for each project Payback Average Return on Capital Employed Net present value (NPV) i. ii. iii. b) Critically discuss the merits and limitations of payback and NPV (Your answer is to be presented in an essay format NOT Bullet Points)
Question 1 Grey Ltd has provided the following figures for two investment projects, only one of which may be chosen. Project X Project Y Initial outlay 200,000 180,000 Profit for year 1 65,000 35,000 65,000 35,000 75,000 65,000 4 35,000 85,000 Estimated resale value at end of year 4 60,000 40,000 Profit is calculated after deducting straight line depreciation. The business has a cost of capital of 10%. Required a) Calculate for each project Payback Average Return on Capital Employed Net present value (NPV) i. ii. iii. b) Critically discuss the merits and limitations of payback and NPV (Your answer is to be presented in an essay format NOT Bullet Points)
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:Question 1
Grey Ltd has provided the following figures for two investment projects, only one of which may
be chosen.
Project X
Project Y
£ _
Initial outlay
200,000
180,000
Profit for year 1
65,000
35,000
2
65,000
35,000
3
75,000
65,000
4
35,000
85,000
Estimated resale value at end of year 4
60,000
40,000
Profit is calculated after deducting straight line depreciation. The business has a cost of capital of
10%.
Required
a) Calculate for each project
i.
Payback
Average Return on Capital Employed
Net present value (NPV)
ii.
iii.
b) Critically discuss the merits and limitations of payback and NPV
(Your answer is to be presented in an essay format NOT Bullet Points)
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