At the beginning of 2015, a business enterprise is trying to decide between two potential investments .
Question:
At the beginning of 2015, a business enterprise is trying to decide between two potential investments.
Required: Assuming a required rate of return of 10% p.a., evaluate the investment proposals under: (a) return on investment, (b) payback period, (c) discounted payback period, and (d) profitability index.
The forecast details are given below.
Proposal A | Proposal B | |
Cost of Investment | $20,000 | 28,000 |
Life | 4 years | 5 years |
Scrap Value | Nil | Nil |
Net Income (After depreciation and tax) | ||
End of 2015 | $500 | Nil |
End of 2016 | $2,000 | $3,400 |
End of 2017 | $3,500 | $3,400 |
End of 2018 | $2,500 | $3,400 |
End of 2019 | Nil | $3,400 |
It is estimated that each of the alternative projects will require an additional working capital of $2,000, which will be received back in full after the end of each project.
Depreciation is provided using the straight line method. The present value of $1.00 to be received at the end of each year (at 10% p.a.) is shown below:
Year | 1 | 2 | 3 | 4 | 5 |
P.V. | 0.91 | 0.83 | 0.75 | 0.68 | 0.62 |
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Expert Answer:
Answer Answer 2 Calculation of profit after tax a Return on investment Proposal A Proposal B Investm... View the full answer
