Kayeu Ltd is evaluating the investment in two new projects X and Y which would generate the following expected net cashflows: Project X Project Y Year 1 320 000 190 000 Year 2 300 000 280 000 Year 3 280 000 290 000 Year 4 240 000 300 000 Year 5 200 000 320 000 Details of the initial invesment for the two projects X and Y are : $950 000 and $1 250 000 with life of 5 years each. Residual value for project X is $150 000 and for Project Y $250 000 The company has a cost of capital of 12% per annum. Discount factors Year 1 0.893 Year 2 0.797 Year 3 0.712 Year 4 0.636 Year 5 0.566 Required (a) Assume that each project will sell for its residual value at the end of five years evaluate each project using each of the following methods: (i) Payback (ii) Accounting rate of return (iii) Net present value (b) based upon your calculation above in (a) advise management which project should be picked.
Kayeu Ltd is evaluating the investment in two new projects X and Y which would generate the following expected net cashflows: Project X Project Y Year 1 320 000 190 000 Year 2 300 000 280 000 Year 3 280 000 290 000 Year 4 240 000 300 000 Year 5 200 000 320 000 Details of the initial invesment for the two projects X and Y are : $950 000 and $1 250 000 with life of 5 years each. Residual value for project X is $150 000 and for Project Y $250 000 The company has a cost of capital of 12% per annum. Discount factors Year 1 0.893 Year 2 0.797 Year 3 0.712 Year 4 0.636 Year 5 0.566 Required (a) Assume that each project will sell for its residual value at the end of five years evaluate each project using each of the following methods: (i) Payback (ii) Accounting rate of return (iii) Net present value (b) based upon your calculation above in (a) advise management which project should be picked.
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 22E
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Question
Kayeu Ltd is evaluating the investment in two new projects X and Y which would generate the following expected net cashflows:
| Project X | Project Y | |
| Year 1 | 320 000 | 190 000 |
| Year 2 | 300 000 | 280 000 |
| Year 3 | 280 000 | 290 000 |
| Year 4 | 240 000 | 300 000 |
| Year 5 | 200 000 | 320 000 |
Details of the initial invesment for the two projects X and Y are : $950 000 and $1 250 000 with life of 5 years each.
Residual value for project X is $150 000 and for Project Y $250 000
The company has a cost of capital of 12% per annum.
Discount factors
| Year 1 | 0.893 |
| Year 2 | 0.797 |
| Year 3 | 0.712 |
| Year 4 | 0.636 |
| Year 5 | 0.566 |
Required
(a) Assume that each project will sell for its residual value at the end of five years evaluate each project using each of the following methods:
(i) Payback
(ii) Accounting
(iii)
(b) based upon your calculation above in (a) advise management which project should be picked.
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