1. Liv Enterprises is considering a national launch of 2 corn chip products under project A and B. The national launch will require the following investments:
Additional manufacturing equipment; Project A: K900,000.00 and Project B: K1,000,000.00
Upgrading existing facilities; Project A: K100,000.00 and project B: K400,000.00 Both of the above would be paid for at the outset and would be depreciated in the accounts over a five year period using straight line with a residual value for both Project A and B of zero.
Projected revenues and costs over a period of five years are given in table below:
PROJECT A |
||
YEAR |
REVENUE |
COSTS |
1 |
K1200000 |
1340000 |
2 |
K2000000 |
K1670000 |
3 |
K2000000 |
K1520000 |
4 |
K2250000 |
K1685000 |
5 |
K2250000 |
K1685000 |
PROJECT B |
||
YEAR |
REVENUE |
COSTS |
1 |
K1300000 |
K1460000 |
2 |
K2100000 |
K1520000 |
3 |
K2200000 |
K1400000 |
4 |
K2400000 |
K160000 |
5 |
K2500000 |
K1720000 |
Required:
(i) Appraise the two projects through the use of Accounting Rate of Return and suggest which of the two offers a better option. Please note that the above costs do not include depreciation.
(ii) results increasingly suggest that Discounted Cash Flow (DCF) techniques are a better way to appraise investment projects as compared to payback method. Summarize reasons why this might be so.
2. In the procurement agreements so signed in question 1 above, explain and give four legal reasons through which these 2contracts can be discharged or terminated.
Live enterprises
(i) Accounting rate of return = (Average net annual income / initial investment) * 100
particulars | Project A |
Project B |
---|---|---|
Revenue (average of all 5 years / 5 ) = A | (1200000 + 2000000+ 2000000 + 2250000+2250000 ) / 5 = 1940000 | (1300000 +2100000 + 2200000 + 2400000 + 2500000 )/5 = 2100000 |
Cost (average of all 5 years / 5 ) = B | (1340000+1670000+1520000+1685000+1685000)/5= 1580000 | (1460000+1520000+1400000+160000+1720000)5=1252000 |
Annual savings = (A-B) = C | 360000 | 848000 |
Less : depreciaton = (Additional manufacturing equipment) / 5 years = D | 900000/5=180000 | 1000000/5=200000 |
tax | - | - |
Annual savings (C-D) = E | 180000 | 648000 |
Add : depreciation | 180000 | 200000 |
Annual cash inflows | 360000 | 848000 |
Accounting rate of return = (Average net annual income / initial investment) * 100
Accounting rate of return = (E / initial investment) * 100
Decision : project B is better .
[note : ARR can be computed alternatively by taking initial investment as a basis of computation { Accounting rate of return = (Average net annual income / average investment) * 100 }. The value of project A and project B would then change accordingly as 40% and 129.6% ]
(ii) Discounted Cash Flow (DCF) techniques are a better way to appraise investment projects as compared to payback method.Reasons are listed below -
2. Causes for Terminating / discharging Legal Contracts -
Rescission of the Contract - A rescission of a contract is when a contract is terminated because an individual misrepresented themselves, acted illegally or made a mistake.
Breach of Contract - When a contract is intentionally not done by one party, it is breach of contract and is grounds for contract termination. A breach of contract may exist because one party failed to meet his obligations at all or did not meet his obligations fully.
Prior Agreement - You may terminate a contract if you and the other party have a prior written agreement that calls for a contract termination because of a specific reason
Performance - all the terms of the contract must be precisely completed to discharge liability.
1. Liv Enterprises is considering a national launch of 2 corn chip products under project A...
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