Question: Tarragon needs to choose between two mutually exclusive investment projects, each lasting for five years. The company uses straight-line method of depreciation and its cost

Tarragon needs to choose between two mutually exclusive investment projects, each lasting for five years. The company uses straight-line method of depreciation and its cost of capital is 10 per cent.

Project Alpha would generate annual cash inflows of 20,000 after the purchase of machinery costing 10,000, with a scrap value after five years of 3,000.

Project Beta would generate annual cash inflows of 50,000 after the purchase of machinery costing 6,000, with a scrap value after five years of 5,000.

Required: Calculate, for each project, the return on capital employed (ROCE) and Internal Rate of Return (IRR). Advise which project should be undertaken based upon the results calculated.

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