A transport company has three potential projects planned. Each will require investment in two refrigerated vehicles at a total cost of K240, 000. The vehicle has a three-year life. The three projects are:Expected cash inflows, after deducting all expected cash outflows, are K120, 000 per annum.Expected cash inflows, after deducting all expected cash outflows, are K90, 000 per annum.Expected cash inflows, after deducting all expected cash outflows, are K80, 000 in year 1, K140, 000 in year 2 and K160, 000 in year 3.You are required to calculate for each project the payback period, the ARR, NPV and IRR, and to discuss why the results from NPV and IRR calculations may sometimes be incompatible with each other. The cost of capital is 10% for the business.

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Answered: A transport company has three potential…

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 21BEA

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A transport company has three potential projects planned. Each will require investment in two refrigerated vehicles at a total cost of K240, 000. The vehicle has a three-year life. The three projects are:
Expected cash inflows, after deducting all expected cash outflows, are K120, 000 per annum.
Expected cash inflows, after deducting all expected cash outflows, are K90, 000 per annum.
Expected cash inflows, after deducting all expected cash outflows, are K80, 000 in year 1, K140, 000 in year 2 and K160, 000 in year 3.

You are required to calculate for each project the payback period, the ARR, NPV and IRR, and to discuss why the results from NPV and IRR calculations may sometimes be incompatible with each other. The cost of capital is 10% for the business.

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