Booklet 7 Investment Appraisal Solutions.xlsx - Ex3.17 Sols

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Investment Appraisal - Exercise 3.17 Unnamed: 1 Unnamed: 2 Unnamed: 3 Unnamed: 4 Unnamed: 5 Unnamed: 6 SOLUTION
ARR Using the Original Equity Expenditure Method:
Average Profit x 100
Original Equity Expenditure
Project £10400 / 4 Years x 100
700
0.34285714285714286
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).