However, he does not wish to reveal his real reasons for favouring project C and so...

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However, he does not wish to reveal his real reasons for favouring project C and so in his report to the chairman, he recommends project C because it shows the highest internal rate of return. The following summary is taken from his report: Year Project A Project B Project C (350,000) (350,000) (350,000) 1 100,000 40,000 200,000 2 110,000 100,000 150,000 104,000 210,000 240,000 4 112,000 260,000 40,000 138,000 160,000 160,000 7 180,000 Internal rate of return for the three projects are A at 27.5%; B at 26.4% and C at 33.0%. The chairman of the company is accustomed to projects being appraised in terms of payback and accounting rate of return, and he is consequently suspicious of the use of internal rate of return as a method of project selection. Accordingly, the chairman has asked for an independent report on the choice of project. The company's cost of capital is 20% and a policy of straight – line depreciation is used to write off the cost of equipment in the financial statements. Required Calculate the accounting rate of return for each project. (5 marks) b. Calculate the net present value for each project. (5 marks) c. Prepare a report for the chairman with supporting calculations indicating which project should be preferred by the ordinary shareholders of Paradis ple. Your report should critically compare and contrast the salient features of Payback, ARR, IRR and NPV as alternative investment appraisal techniques. (10 marks ) a. However, he does not wish to reveal his real reasons for favouring project C and so in his report to the chairman, he recommends project C because it shows the highest internal rate of return. The following summary is taken from his report: Year Project A Project B Project C (350,000) (350,000) (350,000) 1 100,000 40,000 200,000 2 110,000 100,000 150,000 104,000 210,000 240,000 4 112,000 260,000 40,000 138,000 160,000 160,000 7 180,000 Internal rate of return for the three projects are A at 27.5%; B at 26.4% and C at 33.0%. The chairman of the company is accustomed to projects being appraised in terms of payback and accounting rate of return, and he is consequently suspicious of the use of internal rate of return as a method of project selection. Accordingly, the chairman has asked for an independent report on the choice of project. The company's cost of capital is 20% and a policy of straight – line depreciation is used to write off the cost of equipment in the financial statements. Required Calculate the accounting rate of return for each project. (5 marks) b. Calculate the net present value for each project. (5 marks) c. Prepare a report for the chairman with supporting calculations indicating which project should be preferred by the ordinary shareholders of Paradis ple. Your report should critically compare and contrast the salient features of Payback, ARR, IRR and NPV as alternative investment appraisal techniques. (10 marks ) a.

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a The accounting rate of return refers to the percentage return that an investor expects to receive ... View the full answer