The following information relates to two projects of which you have to select one to invest in. Both projects have an initial cost of $400,000 and only one can be undertaken. Project X Y Expected profits $ $ Year 1 160,000 60,000 Year 2 160,000 100,000 Year 3 80,000 180,000 Year 4 40,000 240,000 Estimated resale value at the end of year 4 80,000 80,000 i) Profit is calculated after deducting straight line depreciation ii) The cost of capital is 16% Required: a) For both projects, calculate the following: i) The payback period to one decimal place ii) The accounting rate of return using average investments iii) The net present value iv) Advise the board which project in your opinion should be undertaken, giving reasons for your decision.
The following information relates to two projects of which you have to select one to invest in.
Both projects have an initial cost of $400,000 and only one can be undertaken.
Project X Y
Expected profits $ $
Year 1 160,000 60,000
Year 2 160,000 100,000
Year 3 80,000 180,000
Year 4 40,000 240,000
Estimated resale value at
the end of year 4 80,000 80,000
i) Profit is calculated after deducting straight line depreciation
ii) The cost of capital is 16%
Required:
a) For both projects, calculate the following:
i) The payback period to one decimal place
ii) The accounting
iii) The
iv) Advise the board which project in your opinion should be undertaken, giving
reasons for your decision.
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