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.
(c) The Net present value of 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.