The following information relates to three possible capital expenditure projects. Because of capital rationing, only one project can be accepted: E Initial cost £250,000 Expected life (years) Scrap value expected Expected cash inflows. End of year 1 2 3 4 P 5 5 £20,000 £ Project Q £210,000 £190,000 4 £17,500 £ 75,000 90,000 70,000 70,000 65,000 55,000 60,000 80,000 55,000 R 5 £12,000 £ 60,000 65,000 70,000 75,000 80000 The company estimates its cost of capital is 14 per cent. Required: Calculate a) The payback period for each project. b) The accounting rate of return for each project. c) The net present value of each project. d) Which project should be accepted - give reasons. e) Explain the factors management would need to consider, in addition to the financial factors, before making a final decision on a project.
The following information relates to three possible capital expenditure projects. Because of capital rationing, only one project can be accepted: E Initial cost £250,000 Expected life (years) Scrap value expected Expected cash inflows. End of year 1 2 3 4 P 5 5 £20,000 £ Project Q £210,000 £190,000 4 £17,500 £ 75,000 90,000 70,000 70,000 65,000 55,000 60,000 80,000 55,000 R 5 £12,000 £ 60,000 65,000 70,000 75,000 80000 The company estimates its cost of capital is 14 per cent. Required: Calculate a) The payback period for each project. b) The accounting rate of return for each project. c) The net present value of each project. d) Which project should be accepted - give reasons. e) Explain the factors management would need to consider, in addition to the financial factors, before making a final decision on a 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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Transcribed Image Text:The following information relates to three possible
capital expenditure projects. Because of capital
rationing, only one project can be accepted:
E
P
Initial cost £250,000
Expected life (years)
Scrap value expected
Expected cash inflows
End of year 1
2
3
4
5
5
£20,000
£
Project
Q
£210,000
4
£17,500
£
75,000
90,000
70,000 70,000
65,000
55,000
60,000
80,000
55,000
R
£190,000
5
£12,000
£
60,000
65,000
70,000
75,000
80000
The company estimates its cost of capital is 14 per
cent. Required: Calculate a) The payback period for
each project. b) The accounting rate of return for each
project. c) The net present value of each project. d)
Which project should be accepted - give reasons. e)
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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