Question

In: Accounting

A) The company where you work as Finance Director works on two different projects to increase...

A) The company where you work as Finance Director works on two different projects to increase sales volume and efficiency. Your estimations and expectations regarding the projects are as follows. After you have proven mathematically which project you choose why? please explain your decision

Project A:

  • You estimate that the initial investment cost required for the new machinery will be $2,300,000.
  • You predict that the useful life of the new machinery will be 6 years.
  • You expect the new machine assembly line investment to yield $550,000 net cash flow at the end of each year.
  • You estimate that an annual 11% discount rate will be appropriate for this project.

Project B:

  • It is reported that the software used in production, finance, marketing and R&D departments should be replaced with a higher package in order to increase the efficiency of the software. You estimate that the initial investment value of this project will be $800,000.
  • You predict that the useful life of the new software project will be 10 years.
  • You expect the new software investment to yield $110,000 net cash flow at the end of each year.
  • You estimate that an annual 4% discount rate will be appropriate for this project.

B) Let's assume that we are evaluating a project with ARR (Accounting Rate of Return) technique and we have to make a pre-investment of $ 4m for this project. The investment has a nine-year lifetime, and at the end of nine years, the carrying amount will be only $400,000 (with the straight-line depreciation assumption). Calculate and explain ARRINITIAL and ARRAVERAGE BOOK VALUE for this project. Also, describe the problems encountered in the ARR technique as items

Time

NET REVENUE (INCOME)

BOOK VALUE

0

-----

$4,000,000

1

$350,000

$3,600,000

2

$320,000

$3,200,000

3

$270,000

$2,800,000

4

$240,000

$2,400,000

5

$210,000

$2,000,000

6

$180,000

$1,600,000

7

$140,000

$1,200,000

8

$90,000

$800,000

9

$60,000

$400,000

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