Microtic Ltd, a manufacturer of watches, is considering the selection of one from two mutually exclusive investment projects, each with an estimated five-year life. Project A costs £1,616,000 and is forecast to gener- ate annual cash flows of £500,000. Its estimated residual value after five years is £301,000. Project B, costing £556,000 and with a scrap value of £56,000, should generate annual cash flows of £200,000. The company oper- ates a straight-line depreciation policy and discounts cash flows at 15 per cent p.a.

Microtic Ltd uses four investment appraisal techniques: payback period, net present value, internal rate of return and accounting rate of return (i.e. average accounting profit to initial book value of investment).

Answer rating: 100% (QA)

table of project cash flow year Project A ProjectB 0 1616000 556000 1 5000000 200000 2 5000000 200000 3 5000000 200000 4 5000000 200000 5 5000000 2000... View the full answer