Question: [Question 2] Stubbs Enterprize is considering the following two mutually exclusive projects, each of which require an initial investment of $100,000 and have no salvage
[Question 2]
Stubbs Enterprize is considering the following two mutually exclusive projects, each of which require an initial investment of $100,000 and have no salvage value. This enterprise, which has a cost of capital of 18%, must choose one or the other (ignore taxes).
| Year | Project A | Project B |
| 1 | $10,000 | $50,000 |
| 2 | $20,000 | $40,000 |
| 3 | $30,000 | $30,000 |
| 4 | $40,000 | $20,000 |
| 5 | $50,000 | $30,000 |
Required
- Compute the payback period of these two projects.
- Straight line depreciation is used to compute income. Compute the accounting rate of return (ARR) for these two projects
- Compute the Net Present Value (NPV) of each project.
- Which project is more desirable Using the payback period, ARR, and NPV criteria?
E. Identify TWO (2) advantages and TWO (2) disadvantages of using the payback
period as a method of appraising capital projects
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