Question

4. CAPITAL INVESTMENT DECISIONS The following information relates to three possible capital expenditure projects. Because of capital rationing only one project can be accepted. Project A Project B Project C Initial Cost $230,000 $250,000 $190,000 Expected life 5years 5 years 4 years Scrap value expected $10,000 $15,000 $10,000 Expected Cash Inflows: $ $ $ End Year 1 85,000 95,000 45,000 End Year 2 70,000 70,000 65,000 End Year 3 65,000 55,000 95,000 End Year 4 60,000 50,000 100,000 End Year 5 50,000 50,000 The company estimates cost of capital is 18%. The table below shows the present value of $1 at 14%, 18% and 22%. Periods 14% 18% 22% 1 0.877 0.847 0.820 2 0.769 0.718 0.672 3 0.675 0.609 0.551 4 0.592 0.516 0.451 5 0.519 0.437 0.370 6 0.456 0.370 0.303

Required: Calculate: (a) The payback period for each project (4 marks) (b) The accounting rate of return for each project (5 marks) (c) The net present value for each project (5 marks) (d) The internal rate of return (4 marks) (e) Which project should be accepted – give reasons. (3 marks) (f) Explain the factors that management would need to consider in addition to the financial factors before making a final decision on a project.