Question :

Your company is considering four mutually exclusive capital projects. The details of the projects are set out below:

Project W Project X Project Y Project Z Initial capital investment $600,000 $800,000 5350,000 $400,000 Annual net cash inflow (before tax) 5260,000 $360,000 Annual net cash inflow (after ? $120,000 $155,000 tax) Annual net profit (after tax) ? 7 $50,000 $75,000 20% 20% Depreciation method and rate Straight Straight line line Effective life of the asset 5 years 5 years 5 years 5 years Residual value after 5 years (for depreciation] Company tax rate 30% Weighted average cost of 16% 16% capital Board's internal rate of return 25% 23% required Residual / Salvage Value Nil NII 1. Calculate for project W and X: (a) The annual Net Profit after Tax (b) The annual Cash Flow after Tax 2. Calculate for each project Y and Z: (a) Payback Period (b) Accounting rate of return (ARR) based on original investment only (c) Net present value (NPV) of the discounted cash flows (d) Internal rate of return (IRR) 3. Since they are mutually exclusive projects, which alternative would be selected for each evaluation method? 4. The board of directors have specified that any capital project must achieve a payback period of no longer than 3 years and an accounting rate of return no less than 16%. Based on each board criterion, would you accept or reject either project? Consider each criterion separately in your answer. 5. Using both the NPV and the IRR results, determined in Question 2, would you accept or reject either of the projects? Give your reasons in your answer. 6. When making capital budgeting decisions, businesses may also need to consider non-financial and ethical information before making a decision. List one of these non-financial or ethical consideration