Question: The following 2 mutually exclusive projects (Project A and Project B) are available: Cash Flows (B) Year/s 0 NB: 1 Cash Flows (A) -200 000

The following 2 mutually exclusive projects (Project A and Project B) are available: Cash Flows (B) Year/s 0 NB: 1 Cash Flows (A) -200 000 18 000 2 28 000 3 28 000 4 300 000 -20 000 10 000 9 000 10 000 8 000 1. The company requires a rate of return of 14% on its investment. 2. Assume profits equal cash flows 1.1 Applying the payback rule, which project is more lucrative? (5) 1.2 Using the average rate of return (ARR), determine which project is more viable (3) 1.3 Determine which project is more lucrative if the NPV rule is applied. (11) 1.4 Which method is most reliable? Why? (1)

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