For the following exercise, complete the calculations below.Evaluate different capital investment appraisal techniques bycompleting the calculations shown below:
Bongo Ltd. is considering the selection of one of two mutuallyexclusive projects. Both would involve purchasing machinery with anestimated useful life of 5 years.
Project 1 would generate annual cash flows (receipts lesspayments) of £200,000; the machinery would cost £556,000 with ascrap value of £56,000.
Project 2 would generate cash flows of £500,000 per annum; themachinery would cost £1,616,000 with a scrap value of £301,000.
Bongo uses straight-line depreciation. Its cost of capital is15% per annum.
Assume that all cash flows arise on the anniversaries of theinitial outlay, that there are no price changes over the projectlives, and that accepting either project will have no impact onworking capital requirements.
Assess the choice using the following methods by completing thecalculations shown below:
ARR
NPV
IRR
Payback period
Calculate the missing answers:
Project 1 Project 2 ARR (seeworkings) 33% ??? NPV (壉000) ??? 210 IRR 25% ??? Payback Period(yrs) ??? 3.2
ARR workings (Project 1)
Cash flows 200 Less: depreciation (see below) 100 Accounting profits 100
These profits are the same each year in this question.
Annual depreciation (Cost â SV) / 5
(556,000 â 56,000) / 5 100
Average NBV of investments
(556 + 56) /2 306 ARR 33%
Be sure to demonstrate your workings.
For the following exercise, complete the calculations below.Evaluate different capital investment appraisal techniques bycompleting the calculations shown below:
Bongo Ltd. is considering the selection of one of two mutuallyexclusive projects. Both would involve purchasing machinery with anestimated useful life of 5 years.
Project 1 would generate annual cash flows (receipts lesspayments) of £200,000; the machinery would cost £556,000 with ascrap value of £56,000.
Project 2 would generate cash flows of £500,000 per annum; themachinery would cost £1,616,000 with a scrap value of £301,000.
Bongo uses straight-line depreciation. Its cost of capital is15% per annum.
Assume that all cash flows arise on the anniversaries of theinitial outlay, that there are no price changes over the projectlives, and that accepting either project will have no impact onworking capital requirements.
Assess the choice using the following methods by completing thecalculations shown below:
ARR
NPV
IRR
Payback period
Calculate the missing answers:
| Project 1 | Project 2 | |
| ARR (seeworkings) | 33% | ??? |
| NPV (壉000) | ??? | 210 |
| IRR | 25% | ??? |
| Payback Period(yrs) | ??? | 3.2 |
ARR workings (Project 1)
| Cash flows | 200 |
| Less: depreciation (see below) | 100 |
| Accounting profits | 100 |
These profits are the same each year in this question.
Annual depreciation (Cost â SV) / 5
| (556,000 â 56,000) / 5 | 100 |
Average NBV of investments
| (556 + 56) /2 | 306 |
| ARR | 33% |
Be sure to demonstrate your workings.
Related questions
Bongo Ltd. is considering the selection of one of two mutuallyexclusive projects. Both would involve purchasing machinery with anestimated useful life of 5 years.
Project 1 would generate annual cash flows (receipts lesspayments) of £200,000; the machinery would cost £556,000 with ascrap value of £56,000.
Project 2 would generate cash flows of £500,000 per annum; themachinery would cost £1,616,000 with a scrap value of £301,000.
Bongo uses straight-line depreciation. Its cost of capital is15% per annum.
Assume that all cash flows arise on the anniversaries of theinitial outlay, that there are no price changes over the projectlives, and that accepting either project will have no impact onworking capital requirements.
Assess the choice using the following methods by completing thecalculations shown below:
ARR
NPV
IRR
Payback period
Calculate the missing answers:
| Project 1 | Project 2 | |
| ARR (seeworkings) | 33% | ??? |
| NPV (壉000) | ??? | 210 |
| IRR | 25% | ??? |
| Payback Period(yrs) | ??? | 3.2 |
ARR workings (Project 1)
| Cash flows | 200 |
| Less: depreciation (see below) | 100 |
| Accounting profits | 100 |
These profits are the same each year in this question.
Annual depreciation (Cost â SV) / 5
| (556,000 â 56,000) / 5 | 100 |
Average NBV of investments
| (556 + 56) /2 | 306 |
| ARR | 33% |
Be sure to demonstrate your workings.
