why is my answer wrong? please correct it Required: 2.2.1 Calculate the payback period and the accounting rate of return. 2.2.2 Malda Ltd requires a payback period of no more than 3 years and a return of at least 30%. Purely on the basis of these criteria, should this project be accepted. Explain. 2.2.3 The payback period method makes a crucial omission in the calculation, namely the time value of money. Complete the above computation using a method that accounts for the time value of money? On the basis of this calculation, should the project be accepted? Explain.
2.2.1 Calculate the payback period and the accounting
2.2.2 Malda Ltd requires a payback period of no more than 3 years and a return of at least 30%. Purely
on the basis of these criteria, should this project be accepted. Explain.
2.2.3 The payback period method makes a crucial omission in the calculation, namely the
of money
On the basis of this calculation, should the project be accepted? Explain.
Assumption : It is assumed that the cashflows given in the question are before
| Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Cash flow | 220,000 | 200,000 | 120,000 | 110,000 | 50,000 |
| - Depreciation | (100,000) | (100,000) | (100,000) | (100,000) | (100,000) |
| Earnings before tax | 120,000 | 100,000 | 20,000 | 10,000 | (50,000) |
| Less: Tax at 30% | 36,000 | 30,000 | 6,000 | 3,000 | NIL |
| Earnings after tax | 84,000 | 70,000 | 14,000 | 7,000 | (50,000) |
| + Depreciation | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 |
| Net |
184,000 | 170,000 | 114,000 | 107,000 | 50,000 |
Number of days after 3rd year
= 365 × (550,000 - 468,000) /107,000
= 280 days
total = 3y +280days = 3y280d
The payback period is 3 years 280 days.
Calculation of Accounting rate of return
Average Annual Net earnings
= Earnings after tax ÷ Number of years
= (84,000 + 70,000 + 14,000 + 7,000 - 50,000) / 5
= 25,000
Average Investment
= (Original Investment - Scrap value)/n
= (550,000-50,000) / 5
= 100,000
Accounting rate of return
= Average Annual Net Earnings /Average Investment
= 25,000/100,000
=0.25 or 25%
The payback period method, the project should not be accepted as the actual payback period (3 years 280 days) is more than the required payback period of 3 years.
(3y280d> 3y)
The Accounting rate of return, the project should not be accepted as the actual return(25%) is less the required rate of return of 30%. (25%<30%)
Using this method and discounting rate as 10%(cost of capital)
| Year | Net cash inflow | Net cash inflow discounted @ 10% | Cumulative Net Cashflow |
| 1 | 184,000 | 184000/(1+10%)^1= 167,273 | 167,273 |
| 2 | 170,000 | 170000/(1.10)^2 =140,496 | 307,769 |
| 3 | 114,000 | 114000/1.10^3 = 85,450 | 393,419 |
| 4 | 107,000 | 107000/1.10^4 = 73,082 | 466,501 |
| 5 |
50,000 + 50,000 (salvage)= 100,000 |
100000/1.10^5 = 62,092 | 528,593 |
The project should not be accepted as the payback period is beyond 5 years using the discounted payback period method.
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