| Investment Appraisal - Exercise 3.20 | Unnamed: 1 | Unnamed: 2 | Unnamed: 3 | Unnamed: 4 | SOLUTION |
|---|---|---|---|---|---|
| Project Earned for Project A | |||||
| Profit = Cash Inflow - Depreciation Charge | |||||
| Depreciation = | Initial Investment - Residual Value | ||||
| Life of Project | |||||
| 420000 - 160000 | |||||
| 5 years | |||||
| 52000 | per annum | ||||
| Profit Earned | |||||
| Year 1 | 165000 - 52000 = | 113000 | |||
| Year 2 | 138000 - 52000 = | 86000 | |||
| Year 3 | 105000 - 52000 = | 53000 | |||
| Year 4 | 87000 - 52000 = | 35000 | |||
| Year 5 | 78000 - 52000 = | 26000 | |||
| 313000 | |||||
| Project Earned for Project B | |||||
| Profit = Cash Inflow - Depreciation Charge | |||||
| Depreciation = | Initial Investment - Residual Value | ||||
| Life of Project | |||||
| 330000 - 130000 | |||||
| 5 years | |||||
| 40000 | per annum | ||||
| Profit Earned | |||||
| Year 1 | 225000 - 40000 = | 185000 | |||
| Year 2 | 90000 - 40000 = | 50000 | |||
| Year 3 | 60000 - 40000 = | 20000 | |||
| Year 4 | 54000 - 40000 = | 14000 | |||
| Year 5 | 48000 - 40000 = | 8000 | |||
| 277000 | |||||
| ARR Using the Original Equity Expenditure Method: | |||||
| Average Profit | x 100 | ||||
| Original Equity Expenditure | |||||
| Project A | (113000 + 86000 + 53000 + 35000 + 36000) / 5 Years | x 100 | |||
| 420000 | |||||
| 62600 | x 100 | ||||
| 420000 | |||||
| 0.14904761904761904 | |||||
| Project B | (185000 + 50000 + 20000 + 14000 + 8000) / 5 Years | x 100 | |||
| 330000 | |||||
| 55400 | x 100 | ||||
| 330000 | |||||
| 0.16787878787878788 | |||||
| Using the Payback Method: | |||||
| Project A | Year | Net Cash Inflows | Cumulative Net Cash Inflows | ||
| 1 | 165 | 165 | |||
| 2 | 138 | 303 | |||
| 3 | 105 | 408 | |||
| 4 | 87 | 495 | |||
| 5 | 78 | 573 | |||
| Payback Period = | 3 years + (12 / 87) x 365 days | ||||
| 3 years 50 days | |||||
| Project B | Year | Net Cash Inflows | Cumulative Net Cash Inflows | ||
| 1 | 225 | 225 | |||
| 2 | 90 | 315 | |||
| 3 | 60 | 375 | |||
| 4 | 54 | 429 | |||
| 5 | 48 | 477 | |||
| Payback Period = | 2 years + (15 / 60) x 365 days | ||||
| 2 years 91 days | |||||
| Project B should be chosen if the favoured method of Investment Appraisal | |||||
| is the ARR. Infact in both methods Project B was the favoured project. |