Calculate the pay back period for each project

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Reference no: EM131184204

The following information relates to three possible capital expenditure projects. Because of capital rationing only one project can be accepted.

Project ABC Initial Cost £200 000 £230 000 £180 000

Expected Life 5 years 5 years 4 years

Scrap value expected £10 000 £15 000 £8000

Expected Cash Inflows (£) (£) (£)

End Year 1 80 000 100 000 55 000

End Year 2 70 000 70 000 65 000

End Year 3 65 000 50 000 95 000

End Year 4 60 000 50 000 100 000

End Year 5 55 000 50 000

The company estimates its cost of capital is 18%.

Calculate

(a) The pay back period for each project.

(b) The Accounting Rate of Return for each project.

(d) Which project should be accepted - give reasons.

(e) Explain the factors management would need to consider: in addition to the financial factors before making a final decision on a project.

AAT Stage 3 Cost Accounting and Budgeting Question IM 13.1 Advanced Question IM 13.2 Payback, accounting rate of return and NPV calculations plus a discussion of qualitative factors.

Reference no: EM131184204

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