John & Kelly Inc, a medium-size listed company raised 1,000,000 from the capital market, aiming to...
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John & Kelly Inc, a medium-size listed company raised £1,000,000 from the capital market, aiming to invest in a lucrative project. The Chief Executive Officer (CEO) is currently considering the following three projects, each requires the purchase of equipment. Only one project can be undertaken for investment. Project Y Initial investment £950,000 £900,000 £1,000,000 Useful life 5 years £10,000 5 years £5,000 5 years £20,000 Expected scarp value Expected net cash flows End of year 1 £ £ £ 350,000 320,000 400,000 2 320,000 290,000 320,000 3 280,000 270,000 280,000 4 250,000 220,000 240,000 180,000 200,000 200,000 The CEO asks Sasha Malik, a young and ambitious executive who has recently been appointed to the Chief Financial Officer (CFO) to evaluate these projects and recommend the best project to invest. Sasha considers this appointment as an opportunity to gain experience and enough knowledge before she moves to a Fortune 500 companies in five years. To achieve her ambition, in her report, she recommends project X to invest without providing any credible explanation. The CEO finds the report unusual because she is accustomed to evaluating a project based on the payback period, accounting rate of return, net present value, and internal rate of return. She becomes more suspicious thus, she appoints an independent analyst to do all the relevant calculation and write a report suggesting the best project to invest. John & Kelly Inc follow straight-line depreciation and tries to maintain a 15% cost of capital. Required: (a) Compute the payback period for each project. (6 Marks) (b) Compute the accounting rate of return for each project. (9 Marks) (C) Compute the net present value (NPV) for each project. (12 Marks) (d) Compute the internal rate of return (IRR) for each project. (9 Marks) John & Kelly Inc, a medium-size listed company raised £1,000,000 from the capital market, aiming to invest in a lucrative project. The Chief Executive Officer (CEO) is currently considering the following three projects, each requires the purchase of equipment. Only one project can be undertaken for investment. Project Y Initial investment £950,000 £900,000 £1,000,000 Useful life 5 years £10,000 5 years £5,000 5 years £20,000 Expected scarp value Expected net cash flows End of year 1 £ £ £ 350,000 320,000 400,000 2 320,000 290,000 320,000 3 280,000 270,000 280,000 4 250,000 220,000 240,000 180,000 200,000 200,000 The CEO asks Sasha Malik, a young and ambitious executive who has recently been appointed to the Chief Financial Officer (CFO) to evaluate these projects and recommend the best project to invest. Sasha considers this appointment as an opportunity to gain experience and enough knowledge before she moves to a Fortune 500 companies in five years. To achieve her ambition, in her report, she recommends project X to invest without providing any credible explanation. The CEO finds the report unusual because she is accustomed to evaluating a project based on the payback period, accounting rate of return, net present value, and internal rate of return. She becomes more suspicious thus, she appoints an independent analyst to do all the relevant calculation and write a report suggesting the best project to invest. John & Kelly Inc follow straight-line depreciation and tries to maintain a 15% cost of capital. Required: (a) Compute the payback period for each project. (6 Marks) (b) Compute the accounting rate of return for each project. (9 Marks) (C) Compute the net present value (NPV) for each project. (12 Marks) (d) Compute the internal rate of return (IRR) for each project. (9 Marks)
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ABSWER TO a PAYBACK PERIOD Payback Period plays an important role in taking Investment Decisions It shows the Period within which an entity will be able to recover its Project cost In case of uneven C... View the full answer
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Horngrens Accounting
ISBN: 978-0133855388
10th Canadian edition Volume 2
Authors: Tracie L. Miller-Nobles, Brenda L. Mattison, Ella Mae Matsumura, Carol A. Meissner, Jo-Ann L. Johnston, Peter R. Norwood
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