Question

Question 2
Sirikunga Limited is considering two projects. The projects are similar in nature
and are expected to both operate for four years. Due to unavailability of funds
to undertake both of them, only one project can be accepted.
The cost of capital is 12%
Year 0 1.00
Year 1 0.893
Year 2 0.797
Year 3 0.712
Year 4 0.636
Profit after depreciation
Project A Project B
N$000 N$000
Initial Investment 46 000 46 000
Year 1 26 500 24 500
Year 2 13 500 12 500
Year 3 13 500 4 500
Year 4 (1 500) 14 500
Estimated scrap value at the end of the year 4 000 4 000
Depreciation is charged on the straight line basis.
Required:
a) Calculate the following for both proposals:
i) The payback period (round off your answer to one decimal place) (6 marks)
ii) The net present value (NPV) (8 marks)
iii) The accounting rate of return (ROCE) on initial investment (round off your
answer to one decimal place) (5 marks)
iv) If the two projects are mutually exclusive, which project should be chosen
and why? (2 marks)
b) List two advantages of accounting rate of return methods of appraisal. (2
marks)
c) Explain two non-financial considerations that should be taken into account
before a project is chosen. (2marks)

Answer 1

Answer:

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