Question

The management team of U. Dunnit Limited have four projects for consideration. In the past, they have evaluated projects against simple payback. The following information is available: Project A Project B Project C Project D Capital outlay 65,000 140,000 30,000 160,000 Net cash inflows: 30,000 45,000 20,000 35,000 ear 20,000 45,000 10,000 35,000 ear 15,000 45,000 10,000 55,000 ear Year 4 10,000 45,000 55,000 Year 5 10,000 45,000 65,000 REQUIRED Evaluate the projects using each of the following methods: (a) Payback. (b) Accounting rate of return using full capital outlay (investment). (c) Net present value and profitability index. Assuming a cost of capital of 6%. (d) Intemal rate of return for the project with the best profitability index. (e) Make a recommendation on the method(s) which should be used by the company for future project evaluation.

Answer 1

Solusion- ay Poyback Pesiod e Rayback Period is detined for Project A for Roject 8 S,o0o Yea γ\ Annual | Cumulative 2 180,000 | So, οσο | NEEDED | BECAUSE:- No 10,00s,o n-this ase, the anno al csth Tn this case,thepayback 45% 00 For toject C 3 Sooo S 60,040,0GO 3 10, D pay back, period스 3 pay back period i Te 3 64 YeaY

c 2 A cconth ur V 100 Project 8- He re,the Anmuad, intlews ate oject A 17000 6Sooo APR 615 APR 3. 191- Projec-tD- ARR13933 60060 APR-30, 63% _APR uy.uyl. 3 )3,333

3 Project rojere A Cos h nfuw C61 0(613 130,000|0,913-138390-120,000 10.9013 1886c 1 35,000 920 | 10,000 | Ο.. 712 | 3 6,160 198,S 10 60, 000 38,Slo 74,080 Tota 30,000 Net P resent Vaue 9,08 o 6,16 o Anvity Amunt X Sooox .21E,000

Rto l.3s 140 or 2 6160 2. 30,0G 18Slo.24 where. 0/Af(!9%,s) 19.1, 3.os2 t-

Page-s mov (u(oo0 X 3.058) - 140,000 | 37 610-140,000 390 A-B 7) S-(-8390) 31 0 S PR = 18.83%

Pase- evalu ion. But-