| Investment Appraisal - Exercise 3.21 | Unnamed: 1 | Unnamed: 2 | Unnamed: 3 | Unnamed: 4 | SOLUTION |
|---|---|---|---|---|---|
| Project Earned for Project Alpha | |||||
| Profit = Cash Inflow - Depreciation Charge | |||||
| Depreciation = | Initial Investment - Residual Value | ||||
| Life of Project | |||||
| 80000 - 10000 | |||||
| 4 years | |||||
| 17500 | per annum | ||||
| Profit Earned | |||||
| Year 1 | 20000 - 17500 = | 2500 | |||
| Year 2 | 24000 - 17500 = | 6500 | |||
| Year 3 | 30000 - 17500 = | 12500 | |||
| Year 4 | 20000 - 17500 = | 2500 | |||
| Project Earned for Project Beta | |||||
| Profit = Cash Inflow - Depreciation Charge | |||||
| Depreciation = | Initial Investment - Residual Value | ||||
| Life of Project | |||||
| 90000 - 15000 | |||||
| 4 years | |||||
| 18750 | per annum | ||||
| Profit Earned | |||||
| Year 1 | 30000 - 18750 = | 11250 | |||
| Year 2 | 30000 - 18750 = | 11250 | |||
| Year 3 | 40000 - 18750 = | 21250 | |||
| Year 4 | 22000 - 18750 = | 3250 | |||
| Using the Original Equity Expenditure Method: | |||||
| Average Profit | x 100 | ||||
| Original Equity Expenditure | |||||
| Project | (2500 + 6500 + 12500 + 2500) / 4 Years | x 100 | |||
| Alpha | 80000 | ||||
| 6000 | x 100 | ||||
| 80000 | |||||
| 0.075 | |||||
| Project | (11250 + 11250 + 212500 + 3250) / 4 Years | x 100 | |||
| Beta | 90000 | ||||
| 11750 | x 100 | ||||
| 90000 | |||||
| 0.13055555555555556 | |||||
| Using the Payback Method: | |||||
| Project Alpha | Year | Net Cash Inflows | Cumulative Net Cash Inflows | ||
| 1 | 20 | 20 | |||
| 2 | 24 | 44 | |||
| 3 | 30 | 74 | |||
| 4 | 20 | 94 | |||
| Payback Period = | 3 years + (6 / 20) x 365 days | ||||
| 3 years 110 days | |||||
| Project Beta | Year | Net Cash Inflows | Cumulative Net Cash Inflows | ||
| 1 | 30 | 30 | |||
| 2 | 30 | 60 | |||
| 3 | 40 | 100 | |||
| 4 | 22 | 122 | |||
| Payback Period = | 2 years + (30 / 40) x 365 days | ||||
| 2 years 274 days | |||||
| Project Beta should be chosen if the favoured method of Investment Appraisal | |||||
| is the Payback method. Infact in both methods Project Beta was the favoured | |||||
| project. |