The following information relates to two projects of which you have to select one to invest in. Both projects have an initial cost of $400,000 and only one can be undertaken. Project X Y Expected profits $ $ Year 1 160,000 60,000 Year 2 160,000 100,000 Year 3 80,000 180,000 Year 4 40,000 240,000 Estimated resale value at the end of year 4 80,000 80,000 i) Profit is calculated after deducting straight line depreciation ii) The cost of capital is 16% Required: a) For both projects, calculate the following: i) The payback period to one decimal place ii) The accounting rate of return using average investments iii) The net present value iv) Advise the board which project in your opinion should be undertaken, giving reasons for your decision.

The following information relates to two projects of which you have to select one to invest in. Both projects have an initial cost of $400,000 and only one can be undertaken. Project X Y Expected profits $ $ Year 1 160,000 60,000 Year 2 160,000 100,000 Year 3 80,000 180,000 Year 4 40,000 240,000 Estimated resale value at the end of year 4 80,000 80,000 i) Profit is calculated after deducting straight line depreciation ii) The cost of capital is 16% Required: a) For both projects, calculate the following: i) The payback period to one decimal place ii) The accounting rate of return using average investments iii) The net present value iv) Advise the board which project in your opinion should be undertaken, giving reasons for your decision.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 10P: Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year...

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