Question

QUESTION 2 a) Explain why Net Present Value is considered technically superior to Payback and Accounting Rate of Returns as an investment appraisal technique even though the latter are said to be easier to understand by management. Highlight the strengths of the Net Present Value method and the weakness of the other two methods. (5 marks) b) Your company has the option to invest in projects T and R but finance is only available to invest in one of them. You are given the following projected data Project Ghe Ghc Initial Cost 70,000.00 60,000.00 Profits 15,000.00 18,000.00 20,000.00 32,000.00 18.000 00 20,000.00 25,000.00 (50,000.00) 10,000.00 3.0000 ear ear ear ear Year 5

QUESTION 2 a) Explain why Net Present Value is considered technically superior to Payback and Accounting Rate of Returns as an investment appraisal technique even though the latter are said to be easier to understand by management. Highlight the strengths of the Net Present Value method and the weakness of the other two methods. (5 marks) b) Your company has the option to invest in projects T and R but finance is only available to invest in one of them. You are given the following projected data Project Ghe Ghc Initial Cost 70,000.00 60,000.00 Profits 15,000.00 18,000.00 20,000.00 32,000.00 18.000 00 20,000.00 25,000.00 (50,000.00) 10,000.00 3.0000 ear ear ear ear Year 5

Answer 1

There are many tools to evaluate different projects like

• Net present value
• Project payback period
• Accounting rate of return

Accouting rate of return = Average profit/Average investment*100

Average investment = initial cost + value at the end/2