Question 2 The following information relates to three possible capital expenditure projects. Because of capital rationing, only one project can be accepted: Project P Q R Initial cost £250,000 £210,000 £190,000 Expected life (years) 5 4 5 Scrap value expected £20,000 £17,500 £12,000 Expected cash inflows £ £ £ End of year 1 75,000 90,000 60,000 2 70,000 70,000 65,000 3 65,000 55,000 70,000 4 60,000 80,000 75,000 5 55,000 80000 The company estimates its cost of capital is 14 per cent. Required: only 4 and 5 , because 1,2,3 has been solved The payback period for each project - Solution - Payback Period of Project P = 3 year + (40,000/60,000) = 3.67 Years Payback Period for Project Q = 2 year + (50,000/55,000) = 2.91 Years Payback Period for Project R = 2 year + (65,000/70,000) = 2.93 Years The accounting rate of return for each project. Solution - ARR For Project P = 48.15 % ARR For Project Q = 64.84 % ARR For Project R = 69.31 % The net present value of each project. Solution - NPV of Project P = (10,523.74) NPV of Project Q = 15,492.51 NPV of Project R = 45,686.87 Which project should be accepted – give reasons. Explain the factors management would need to consider, in addition to the financial factors, before making a final decision on a project.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question 2

The following information relates to three possible capital expenditure projects. Because of capital rationing, only one project can be accepted:


	Project
	P	Q	R
Initial cost	£250,000	£210,000	£190,000
Expected life (years)	5	4	5
Scrap value expected	£20,000	£17,500	£12,000
Expected cash inflows	£	£	£
End of year 1	75,000	90,000	60,000
2	70,000	70,000	65,000
3	65,000	55,000	70,000
4	60,000	80,000	75,000
5	55,000		80000

The company estimates its cost of capital is 14 per cent.

Required: only 4 and 5 , because 1,2,3 has been solved

The payback period for each project - Solution -
Payback Period of Project P

= 3 year + (40,000/60,000)

= 3.67 Years

Payback Period for Project Q

= 2 year + (50,000/55,000)

= 2.91 Years

Payback Period for Project R

= 2 year + (65,000/70,000)

= 2.93 Years
The accounting rate of return for each project. Solution -
ARR For Project P = 48.15 %

ARR For Project Q = 64.84 %

ARR For Project R = 69.31 %
The net present value of each project. Solution -
NPV of Project P = (10,523.74)

NPV of Project Q = 15,492.51

NPV of Project R = 45,686.87
Which project should be accepted – give reasons.
Explain the factors management would need to consider, in addition to the financial factors, before making a final decision on a project.

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