Batelco Inc. is considering two mutually exclusive projects A and B. Each project requires an initial investment as presented in the below table. The economic life of the project A

will be 5-Year's and Project B will be 6 years, and both projects carry same risk. Batelco Inc uses a discount rate of 12%. After considering the current economic situation Batelco

Inc. has set a maximum payback period of 4 years and minimum return on investment (ROI) 18%. A financial analyst, prepared estimates of the annual revenues and costs associated

with each project as in the below table:

Projects A

240,000

60,000

12000

Projects B

470,000

80,000

14000

Cost of equipment

Working Capital needed

Overhaul of the equipment in

two years

Annual revenues and costs:

Sales revenues

Variable expenses

Depreciation expense

Fixed out-of-pocket operating

costs

Life of Project

375,000

180,000

48,000

90,000

300,000

90,000

78,333

70,000

5 year

6 years

The working capital will be released sth and 6th year of the project A and project B respectively, for investment elsewhere within the company.

Required:

1. Calculate the net present value for each project. (4 Marks)

2. Calculate the simple rate of return for each product. (4 Marks)

3. Which of the two projects (if either) would you recommend that Batelco Inc. accept? Why? (2 Mark)

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