1.1 Required Calculate the following from the information provided below 1.1.1 Accounting Rate of Return on...
1.1 Required
Calculate the following from the information provided below
1.1.1 Accounting Rate of Return on (on average investment) of project CHI ( answer rounded off to 2 decimal places)
1.1.2 Net Present Value of Project THI
1.1.3 Internal Rate of Return of Project CHI, if net cash flows are 80000 per year for 4 years, (Answer rounded off to 2 decimal places)
Information
Kurba Limited had to choose between purchasing machinery for two projects, CHI and THI, for which the following profits are forecast:
Year CHI THI
1 20000 5000
2 20000 18000
3 20000 24000
4 20000 33000
Each project requires an investment of 240000. the machinery have no salvage value. the cost of capital is 12 %. the straight line depreciation is used.
NB: Discount Factors are as follows
Project THI
year Discount factor
1 0.8929
2 0.7972
3 0.6355
4 0.5674
Project CHI
Year 12% 13%
1-4 3.0373 2.9745
Homework Answers
Facts:
| CHI | THI | |
| Initial outlay | $ 240,000 | $ 240,000 |
| Useful Life | $ 4 | $ 4 |
| Depreciation | $ 60,000 | $ 60,000 |
| Salvage value | Nil | Nil |
| ARR of Project CHI | ||
| Profits | $ 20,000 | per year |
| Average Net income | $ 20,000 | |
| Average Investment | $ 240,000 | |
| ARR | =20000/240000 | 8.33% |
| NPV of Project THI | |||||
| Year | 1 | 2 | 3 | 4 | Total |
| Profits | $ 5,000 | $ 18,000 | $ 24,000 | $ 33,000 | |
| Add: Depreciation | $ 60,000 | $ 60,000 | $ 60,000 | $ 60,000 | |
| Cash flows | $ 65,000 | $ 78,000 | $ 84,000 | $ 93,000 | |
| PVF@ 12% | $ 0.8929 | $ 0.7972 | $ 0.6355 | $ 0.5674 | |
| PV cash flows | $ 58,038.50 | $ 62,181.60 | $ 53,382.00 | $ 52,768.20 | $ 226,370.30 |
| Less: Initial Outlay | $ 240,000.00 | ||||
| NPV | $ (13,629.70) |
| IRR of Project CHI | |
| IRR is the rate at which discounted cash inflows are equal to initial investment. | |
| Net Cash flows every year | $ 80,000.00 |
| AF (12%,4) | $ 3.04 |
| Discounted cash inflows@12% | $ 242,984.00 |
| AF (13%,4) | $ 2.97 |
| Discounted cash inflows@13% | $ 237,960.00 |
| IRR | =12% + (242984-240000)/(242984-237960) * 1% |
| =12% + 2984/5024 * 1% | |
| 12.59% |
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