The following information relates to two possible capital projects, one of which you should choose to invest
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Question:
The following information relates to two possible capital projects, one of which you should choose to invest in. Both projects have an initial capital cost of $210,000 and only one can be undertaken.
Projects | X | Y |
Expected profits | $ | $ |
Year 1 | 85.000 | 35.000 |
2 years | 70.000 | 50.000 |
3 years | 40.000 | 90.000 |
4 years | 20.000 | 120.000 |
Estimated resale value at the end of year 4 | 40.000 | 40.000 |
Note: Profit is calculated after deducting straight-line depreciation.
Cost of capital 16%
Year | 1 | 2 | 3 | 4 |
%16 | 0,862 | 0,743 | 0,641 | 0,553 |
Necessary:
a) Calculate the following for both projects:
(i) Payback period to one decimal place.
(ii) Accounting rate of return using the average investment
(iii) Net present value
b) Inform the board which project should be undertaken, giving the reasons for your decision.
Related Book For
Advanced Accounting
ISBN: 978-0538480284
11th edition
Authors: Paul M. Fischer, William J. Tayler, Rita H. Cheng
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