| Investment Appraisal - Exercise 3.17 | Unnamed: 1 | Unnamed: 2 | Unnamed: 3 | Unnamed: 4 | SOLUTION |
|---|---|---|---|---|---|
| ARR Using the Original Equity Expenditure Method: | |||||
| Average Profit | x 100 | ||||
| Original Equity Expenditure | |||||
| Project | £10400 / 4 Years | x 100 | |||
| 700 | |||||
| 0.34285714285714286 | 0.37 | ||||
| Using the Payback Method: | |||||
| Project | Year | Net Cash Inflows | Cumulative Net Cash Inflows | ||
| 1 | 40 | 40 | |||
| 2 | 140 | 180 | |||
| 3 | 300 | 480 | |||
| 4 | 280 | 760 | |||
| 5 | 120 | 880 | |||
| Payback Period = | 3 years + (220 / 280) x 365 days | ||||
| 3 years 287 days | |||||
| The project should be adopted as Frank PLC wanted a ARR of 24% and | |||||
| this project is making a higher return than this (34.29%). Also the project | |||||
| is being paid back in less that the 4 years required (3 years 287 days). |