Question

TOTAL: 20 MARKS QUESTION 5 (15 MARKS) A.Metro Way Enterprise is considering a long-term investment project called UP. UP will require an investment of RM120,440. Annual revenues would increase by RM79,000 and annual expenses would increase by RM69,410. The company's required rate of return on any new project is 6% 11 ENGLISH VERSION Required: Determine the accounting rate of return of the investment net Gon ded v 13 marks) Based on the accounting rate of return, should project UP beaccepted? Provide (ity reason of your answer (2 marks) B. Happy Custom Enterprise is considering three rew projects; Z-1, Z-2 and Z-3. Each project requiring an investment on equipment of RM25,080 and will last for 3 years. The following is the net annual cash flows by project Z-3 Year Z-1 Z-2 RM14,820 RM7,980 RM11,400 1 RM13,680 RM13,680 2 RM10,260 RM12,540 RM11,400 3 RM13,680 straight-line The equipment's salvage value is zero, and Happy Custom uses depreciation Happy Custom will not accept any projeçt with a cash payback period over 2 years. Happy Custom's required rate of return is 12 % . Required: Determine the payback period of each project. (3 marks) Based on the payback period, which is the most desirable project? Provide (n) reason of your answer. (2 marks) Determine the net present value of each project. (3 marks) Based on the net present value, which is the most desirable project? Provide reason of your answer. (2 marks) TOTAL: 15 MARKS END OF QUESTION 12

Answer 1

Accounting rate of return: Average yearly income/Investment Increase in Annual Revenue Less: Increase in Annual Expense RM69,410 Increase in Annual Income Ans A(i) RM79,000 RM9,590 Investment/cost RM120,440 Accounting rate of return 7.96% [RM9590/RM120440] Ans A(ii Based on the accounting rate of return the project should be accepted as because the accounting rate of return i.e. 7.96% is higher than the required rate for the new investment i.e. 6 %