Tata Ltd, a manufacturer of watches, is considering the selection of one of two mutually exclusive...

 

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Tata Ltd, a manufacturer of watches, is considering the selection of one of two mutually exclusive investment projects, each with an estimated five-year life. Project A costs $1,616,000 and is forecast to generate annual cash flows of $500,000. Its estimated residual value after five years is $301,000. Project B, costing $556,000 and with a scrap value of $56,000 should generate annual cash flows of $200,000. The company operates a straight line depreciation policy and discounts cash flows at 15 per cent per annum. Tata Ltd, uses THREE (3) investment appraisal techniques which are payback period, net present value and accounting rate of return (i.e. average accounting profit to initial book value of investment). Compute the appropriate calculations under the THREE (3) investment techniques stated above and give reasons for your investment advice. Requirement: Make a theoretical proper introduction on the type of decision criteria used in practice? Tata Ltd, a manufacturer of watches, is considering the selection of one of two mutually exclusive investment projects, each with an estimated five-year life. Project A costs $1,616,000 and is forecast to generate annual cash flows of $500,000. Its estimated residual value after five years is $301,000. Project B, costing $556,000 and with a scrap value of $56,000 should generate annual cash flows of $200,000. The company operates a straight line depreciation policy and discounts cash flows at 15 per cent per annum. Tata Ltd, uses THREE (3) investment appraisal techniques which are payback period, net present value and accounting rate of return (i.e. average accounting profit to initial book value of investment). Compute the appropriate calculations under the THREE (3) investment techniques stated above and give reasons for your investment advice. Requirement: Make a theoretical proper introduction on the type of decision criteria used in practice?

Answer rating: 100% (QA)

SOLUTION table of project cash flow year Project A 1616000 556000 5000000 200000 2 5000000 200000 3 ... View the full answer