The following information relates to three possible capital expenditure projects. Because of capital rationing only one project

Question:

The following information relates to three possible capital expenditure projects. Because of only one project can be accepted.

The company estimates its cost of capital is 18 per cent.
Calculate:
(a) The payback period for each project.
(b) The accounting rate of return for each project.
(c) The net present value of each project.
(d) Which project should be accepted - give reasons.
(e) Explain the factors management would need to consider, in addition to the financial factors, before making a final decision on a project.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Capital Rationing
Capital rationing is the act of placing restrictions on the amount of new investments or projects undertaken by a company. Capital rationing is the decision process used to select capital projects when there is a limited amount of funding available.... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...