You have been asked to evaluate 2 projects using only profitability models.

a)Show the formula and calculate Average Rate of Return (ARR) and Payback Period (PP) for the following projects. (4 marks).

b) If you were making a decision based purely on Average Rate of Return, which project would you select? (1 mark)

c) If you were making a decision based purely on Payback Period, which project would you select? (1 mark)

PROJECT APPLE	PROJECT BANANA
Interest Rate = 8%	Interest Rate = 4%
Inflation = 2%	Inflation = 9%
Fixed Investment = $200,000	Fixed Investment = $50,000
Annual Cash Inflow = $15,000	Annual Cash Inflow = $10,000
Avg. Annual Profit = $12,000	Avg. Annual Profit = $6,000