The following information relates to three (3) possible capital expenditure projects. Because of capital rationing only one project can be accepted.
Projects
A B C
Initial cost $200,000 $230,000 $180,000
Expected life 5 years 5 years 4 years
Scrap value expected $10,000 $15,000 $8,000
Expected cash inflows $ $ $
End Year 1 80,000 100,000 55,000
2 70,000 70,000 65,000
3 65,000 50,000 95,000
4 60,000 50,000 100,000
5 55,000 50,000 -
The company estimates its cost of capital is 18% and discount rate factors are:
Year 1 0.8475
Year 2 0.7182
Year 3 0.6086
Year 4 0.5158
Year 5 0.4371
Calculate:
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The pay back period for each project
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The Accounting Rate of Return (ARR) for each project
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The Net Present Value (NPV) of each project
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Which project should be accepted – give reasons
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Explain the factors management would need to consider – in addition to the financial factors before making a final decision on a project.