Reference no: EM131213940
Part A
For the following exercise, complete the calculations below. Evaluate different capital investment appraisal techniques by completing the calculations shown below:
Bongo Ltd. is considering the selection of one of two mutually exclusive projects. Both would involve purchasing machinery with an estimated useful life of 5 years.
Project 1 would generate annual cash flows (receipts less payments) of £200,000; the machinery would cost £556,000 with a scrap value of £56,000.
Project 2 would generate cash flows of £500,000 per annum; the machinery would cost £1,616,000 with a scrap value of £301,000.
Bongo uses straightline depreciation. Its cost of capital is 15% per annum.
Assume that all cash flows arise on the anniversaries of the initial outlay, that there are no price changes over the project lives, and that accepting either project will have no impact on working capital requirements.
Assess the choice using the following methods by completing the calculations shown below:
 ARR
 NPV
 IRR
 Payback period
Calculate the missing answers:

Project 1

Project 2

ARR (see workings)

33%

???

NPV (£'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  SV) / 5
(556,000  56,000) / 5

100

Average NBV of investments
(556 + 56) /2

306

ARR

33%

Be sure to demonstrate your workings.