Question

Q 3.

The following data relate to two investment projects, only one of which may be selected

                                                                                                            Project A             project B

                                                                                                                  ₵                           ₵

Initial capital expenditure                                                                   50,000                     50,000

Profits: year        1                                                                             25,000                     10,000

                           2                                                                             20,000                     10,000

                          3                                                                              15,000                     14,000

                          4                                                                              10,000                      26,000

Estimated resale value at end of year 4                                            10,000                      10,000

Note

1. Profit is calculated after deducting straight – line depreciation.
2. The cost of capital is 10 per cent

Required

1. Calculate for each project:

1. Average annual rate of return on average capital invested;
2. Payback period
3. Net present value

2. Briefly discuss the relative merits of the three methods of evaluation in (a) above.
3. Explain which project you would recommend for acceptance.

Answer 1