The following information relates to three capital expenditure projects only one of which can be chosen: Project
Question:
The following information relates to three capital expenditure projects only one of which can be chosen:
Project A Project B Project C I
Initial cost R400 000 R460 000 R360 000
Expected life 5 years 5 years 4 years
Expected scrap value R20 000 R30 000 R16 000
Expected net cash inflows:
R R R
End of year 1 160 000 200 000 110 000
2 140 000 140 000 65 000
3 130 000 100 000 95 000
4 120 000 100 000 100 000
5 110 000 100 000 0
End of year 1 160 000 200 000 110 000
2 140 000 140 000 65 000
3 130 000 100 000 95 000
4 120 000 100 000 100 000
5 110 000 100 000 0
Note: • The company estimates its cost of capital is 18%.
• Use the following discount factors to calculate net present value:
CARE: DO NOT CALCULATE CASHFLOW/ CUMMULATIVE CASHFLOW
Required:
1.1 Calculate the payback period for project B.
1.2 Calculate the accounting rate of return for project C.
1.3 Calculate the net present value of each project.
1.4 Using the answers from question
1.3, which project should be chosen? Provide reasons.