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- 15 Marks
Question
ASANTA Ghana Ltd is considering investing in the following projects which are considered mutually exclusive:
| PROJECT GO | PROJECT COME | |
|---|---|---|
| Annual cash inflows | GH¢1,000,000 | GH¢2,000,000 |
| Cost of Machine | GH¢2,500,000 | GH¢6,000,000 |
| Scrap value of Machine | GH¢250,000 | GH¢1,000,000 |
| Expected life of the Project | 5 years | 5 years |
ASANTA Ghana Ltd uses the straight line method of depreciation. However, tax-allowable depreciation is 30% on a straight-line basis. The cost of capital for the company is 20% per annum.
Required:
- Calculate the Accounting Rate of Return (ARR) for each project. (4 marks)
- Calculate the Net Present Value (NPV) for each project. (4 marks)
- Compute the Internal Rate of Return (IRR) for each project. (4 marks)
- Compute the Payback period for each project. (3 marks)
(Note: In each of the above, advise the Company on which of the projects to implement or undertake.)
Answer
- Topic: Introduction to Investment Appraisal
- Series: MAY 2019
- Uploader: Joseph