Reference no: EM132640479

Question - As the accountant for Grow Management Consultants, you have been asked to assist the company in making a decision about a $16 million investment in a capital investment project.

The company plans to develop a new customer relationship management system, based on feedback from their clients regarding gaps in existing systems.

The company has provided you with the following information based on preliminary forecasts they have made on annual profits (plus a loss in the first year) and annual cash flow.

Year Profit/Loss Cash Flow

1 Loss $4m Cash flow at year-end ($2m)

2 Profit $4m Cash flow at year-end ($2m)

3 Profit $4m Cash flow at year-end ($6m)

4 Profit $4m Cash flow at year-end ($10m)

Additional information: Residual value at the end of year 4 is expected to be nil. The cost of capital for the company is estimated as 6%.

Based on the information above, the company wished you to complete number of calculations to advise on the feasibility of the project.

Complete the following activities:

1. Write capital investment report.

Your report should be professionally presented, be written in clear and concise English and be error free. As a guide, your report should be about one-page long.

To complete the report, you will need to calculate the following:

Accounting rate of return on average investment, including an explanation of the purpose of this form of asset pricing model and the advantages and disadvantages of this model.

Accounting rate of return on total investment including an explanation of the purpose of this form of asset pricing model and the difference between this model and the accounting rate of return on total investment.

Payback period and the purpose of the method of project evaluation and its main features.

Net Present Value, including an outline of the purpose of using this method.