As the Finance Manager for ABC Ltd$,$ you have been asked to evaluate two $(2)$ Capital Investment Project which may assist the Company in achieving its objectives. Both projects will require an initial investment of GH$250,000\mathrm{.}00$ in plant and machinery but no additional working capital is needed. The expected cash flows of the two projects are as follows:

Year

Project A

GH

Project B

GH

$1$

$20,000$

$103,000$

$2$

$35,000$

$100,000$

$3$

$55,000$

$25,000$

$4$

$50,000$

$20,000$

$5$

$150,000$

$20,000$

$6$

$60,000$

$25,000$

$7$

$50,000$

$85,000$

The cost of Capital of the Company is $15\%,$ The Project A has a scrap value of GH$10,000$ whilst the Project B has an estimated scrap value of GH$5,000.$ ABC Ltd$,$ has a target return on capital employed of $20\%.$

Required:

Based on the following investment appraisal methods, rank the project in order of investment potential.

Accounting Rate of Return $($ARR$)$

Net Present Value $($NPV$)$

Payback period

IRR

$($b$)$State any four advantages and disadvantages of the above appraisal methods

Answer rating: 100% (QA)

a Based on the investment appraisal methods ARR Project A ... View the full answer