QUESTION $5$

$[$TOTAL: $20$ MARKS$]$

The following information relates to three possible capital expenditure projects.

Because of capital rationing only one project can be accepted:

$\backslash$table$[[,$Projects$],[,$A$,$B$,$C$],[$Initial cost$,$$$200,000,$$$230,000,$$$180,000],[$Expected life,$5$ years,$5$ years,$4$ years$],[$Scrap value expected,$$10,000,$$$15,000,$$$8,000],[$Expected cash inflows,$$,$$$,$$$],[$End year $1,80,000,100,000,55,000],[2,70,000,70,000,65,000],[3,65,000,50,000,95,000],[4,60,000,50,000,100,000],[5,55,000,50,000,]]$

Page $7$ of $8$

The company estimates its cost of capital to be $18$ percent.

Required:

Calculate:

a$)$ The payback period for each project.

marks$)$

b$)$ The accounting rate of return for each project.

marks$)$

c$)$ The net present value of each project.

$(4$

marks$)$

d$)$ Which project should be accepted $-$ give reasons.

$4$

$(7)$

marks$)$

e$)$ Explain the factors management would need to consider, in addition to the financial factors, before making a final decision on a project.

$13.$

marks$)$

$44$