Question 2 The directors of Paulter Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new equipment. The following information is available for each project: Cost (immediate outlay) Expected annual operating profit (loss) Year 1 2 3 4 5 Estimated residual value of the plant after 5 years Project 1 £ 120,000 Required: a) Calculate the annual depreciation of each project b) Calculate for each project: i. ii. 29,000 (8,000) 12,000 22,000 18,000 7,000 Project 2 £ 80,000 18,000 (2,000) 9,000 12,000 14,000 6,000 The business uses the straight-line method of depreciation for all of its non-current (fixed) assets when calculating operating profit. Because of capital rationing only one project can be accepted. The business has an estimated cost of capital of 8%. the net present value; the accounting rate of return; the payback period c) State with reasons which, if any, of the two investment projects the directors of Paulter Ltd should accept.
Question 2 The directors of Paulter Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new equipment. The following information is available for each project: Cost (immediate outlay) Expected annual operating profit (loss) Year 1 2 3 4 5 Estimated residual value of the plant after 5 years Project 1 £ 120,000 Required: a) Calculate the annual depreciation of each project b) Calculate for each project: i. ii. 29,000 (8,000) 12,000 22,000 18,000 7,000 Project 2 £ 80,000 18,000 (2,000) 9,000 12,000 14,000 6,000 The business uses the straight-line method of depreciation for all of its non-current (fixed) assets when calculating operating profit. Because of capital rationing only one project can be accepted. The business has an estimated cost of capital of 8%. the net present value; the accounting rate of return; the payback period c) State with reasons which, if any, of the two investment projects the directors of Paulter Ltd should accept.
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 2
The directors of Paulter Ltd are currently considering two mutually exclusive investment projects. Both
projects are concerned with the purchase of new equipment. The following information is available for each
project:
Cost (immediate outlay)
Expected annual operating profit (loss)
Year 1
2
3
4
5
Estimated residual value of the plant after 5 years
Project 1
£
120,000
29,000
(8,000)
12,000
22,000
18,000
7,000
Project 2
£
80,000
18,000
(2,000)
9,000
12,000
14,000
6,000
The business uses the straight-line method of depreciation for all of its non-current (fixed) assets when
calculating operating profit. Because of capital rationing only one project can be accepted. The business has
an estimated cost of capital of 8%.
Required:
a) Calculate the annual depreciation of each project
b) Calculate for each project:
i.
the net present value;
ii.
the accounting rate of return;
iii.
the payback period
c) State with reasons which, if any, of the two investment projects the directors of Paulter Ltd should
accept.
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