Question

Cash Flows Project A Project B (10,000) (10,000) 5000 7000 12,000 50,000 These projects are mutually exclusive. 1, 2.

Managerial accounting question.

Can someone help me figure this out?

Answer 1

	a)
	Payback Period
	On prima facie obervation we can see that
	project A recovers its investment between first and second year
	whereas Project B receovers between second and third year
	Therefore payback period as follows.
	Project A
		= 1 year + 5000/7000
		=1.71 years
	Project B
		= 2 year + 10000/50000
		=2.2 years
	b)	Accounting rate of return= average net income / average investment
		Project A
		Average Net Income = (5000+7000+12000)/3 =
				=$8000
		Average Investment = (10000+0)/2
			=$5000
		ARR =8000/5000
		160%
		Project B
		Average Net Income = (50000)/3 =
			$         16,667
		Average Investment = (10000+0)/2
			=$5000
		ARR =16667/5000
		333%
	c)	IRR project A
		For IRR let us calculate NPV at 10% and 60%
	Year	Cash flow(CF)	PVF 10%	PVCF 10%	PVF 60%	PVCF 60%
	0	$    -10,000	1.000	$    -10,000.00	1.000	$   -10,000.00
	1	$        5,000	0.909	$        4,545.45	0.625	$       3,125.00
	2	$        7,000	0.826	$        5,785.12	0.391	$       2,734.38
	3	$      12,000	0.751	$        9,015.78	0.244	$       2,929.69
		NPV		$        9,346.36		$     -1,210.94
		IRR =10% + $9346.36/(9346.36+1210.94)*50%
		IRR =50%
	d)	NPV of project at 10% = $9346.36
		(as calculated in solution c)