(a) Calculation of Accounting Rate of Return (ARR), Payback Period (PP), and Net Present Value (NPV)...

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(a) Calculation of Accounting Rate of Return (ARR), Payback Period (PP), and Net Present Value (NPV) for each project: Project B: (i) Accounting Rate of Return (ARR): ARR = Average annual profit + Average investment = (33,000+2)+(100 2) = 165% (ii) Payback Period (PP): Year 1: (100-29) = 71 Year 2: 71-(-1) = 72 Year 3: 72-6 = 66 =2) PP = 2 years + (66 6) = 3 years (iii) Net Present Value (NPV): Discount factor for 10% for each year is: Year 1: 1+ (1 + 10%) 1 = 0.909 Year 2: 1+ (1 + 10%) 2 = 0.826 Year 3: 1 (1+10%) 3 = 0.751 NPV = -100 + (29 x 0.909) + (-1 x 0.826) + (6 x 0.751) + (40 x 0.751) = 8,000 Project A: (i) Accounting Rate of Return (ARR): ARR = Average annual profit + Average investment = (20,000 2) (60 2) = 166.7% (ii) Payback Period (PP): Year 1: (60-18) = 42 Year 2: 42-(-2) = 44 Year 3: 44 - 4 = 40 PP = 2 years + (40 6) = 2 years and 7 months (iii) Net Present Value (NPV): Discount factor for 10% for each year is: Year 1:1 (1+ 10%) 1 = 0.909 Year 2:1 (1+10%) 2 = 0.826 Year 3:1 (1+10%) = 0.751 NPV = -60 + (18 x 0.909) + (-2 x 0.826) + (4 x 0.751) + (24 x 0.751) = 3,000 (b) Merits of Payback and Net Present Value methods of evaluation: (a) Calculation of Accounting Rate of Return (ARR), Payback Period (PP), and Net Present Value (NPV) for each project: Project B: (i) Accounting Rate of Return (ARR): ARR = Average annual profit + Average investment = (33,000+2)+(100 2) = 165% (ii) Payback Period (PP): Year 1: (100-29) = 71 Year 2: 71-(-1) = 72 Year 3: 72-6 = 66 =2) PP = 2 years + (66 6) = 3 years (iii) Net Present Value (NPV): Discount factor for 10% for each year is: Year 1: 1+ (1 + 10%) 1 = 0.909 Year 2: 1+ (1 + 10%) 2 = 0.826 Year 3: 1 (1+10%) 3 = 0.751 NPV = -100 + (29 x 0.909) + (-1 x 0.826) + (6 x 0.751) + (40 x 0.751) = 8,000 Project A: (i) Accounting Rate of Return (ARR): ARR = Average annual profit + Average investment = (20,000 2) (60 2) = 166.7% (ii) Payback Period (PP): Year 1: (60-18) = 42 Year 2: 42-(-2) = 44 Year 3: 44 - 4 = 40 PP = 2 years + (40 6) = 2 years and 7 months (iii) Net Present Value (NPV): Discount factor for 10% for each year is: Year 1:1 (1+ 10%) 1 = 0.909 Year 2:1 (1+10%) 2 = 0.826 Year 3:1 (1+10%) = 0.751 NPV = -60 + (18 x 0.909) + (-2 x 0.826) + (4 x 0.751) + (24 x 0.751) = 3,000 (b) Merits of Payback and Net Present Value methods of evaluation:

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