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. (5 marks)

b) If you were making a decision based purely on Average Rate of Return, which project would you select? (2 marks)

c) If you were making a decision based purely on Payback Period, which project would you select? (2 marks)

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