A company with a cost of capital of 9% is trying to decide whether to undertake...

 

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A company with a cost of capital of 9% is trying to decide whether to undertake Project A which has a scrap value of 2,000 at the end of its life. The relevant details are given below: Initial Cost Project A 42,000 Net Inflows Year 1 20,000 Year 2 24,000 Year 3 5,000 Year 4 3,000 Net Present Value Table Rate 8% 9% 10% 11% 12% 13% 14% 15% 16% Year 0 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 2 23 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 3 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 4 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 5 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 Required: (a) Calculate the NPV for the project and state whether it is worthwhile. (b) Calculate the Accounting Rate of Return (ARR) for the project and comment on your results. (c) Calculate the payback for the project. (d) Calculate the IRR of the project by using the NPV calculated in (a) above at 9% and a discount rate of 15%. (e) Discuss the advantages and drawbacks of using NPV, ARR and IRR as methods of project appraisal and which should be selected in preference to the other. A company with a cost of capital of 9% is trying to decide whether to undertake Project A which has a scrap value of 2,000 at the end of its life. The relevant details are given below: Initial Cost Project A 42,000 Net Inflows Year 1 20,000 Year 2 24,000 Year 3 5,000 Year 4 3,000 Net Present Value Table Rate 8% 9% 10% 11% 12% 13% 14% 15% 16% Year 0 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 2 23 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 3 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 4 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 5 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 Required: (a) Calculate the NPV for the project and state whether it is worthwhile. (b) Calculate the Accounting Rate of Return (ARR) for the project and comment on your results. (c) Calculate the payback for the project. (d) Calculate the IRR of the project by using the NPV calculated in (a) above at 9% and a discount rate of 15%. (e) Discuss the advantages and drawbacks of using NPV, ARR and IRR as methods of project appraisal and which should be selected in preference to the other.