Fiesole Ltd is considering the selection of one of a pair of mutually exclusive capital investment projects. Both would involve the purchase of machinery with a life of five years. Fiesole uses the straight-line method for calculating depreciation and its cost of capital is 15% per year.
Project 1 would generate annual net cash inflows of £400,000; the machinery would cost £1,112,000 and have a scrap value of £112,000.
Project 2 would generate annual net cash inflows of £1,000,000; the machinery would cost £3,232,000 and have a scrap value of £602,000.

Tasks:
1. For each project, calculate:
a) the accountancy rate of return (using the initial investment);
b) the payback period;
c) the net present value.
2. State which project, if any, you would recommend for acceptance. Give your reasons.