Bluestone Ltd has provided the following figures for two investment projects, only one of which may be chosen. Project A Project B £ £ Initial outlay 190,000 170,000 Profit for year 1 55,000 15,000 2 40,000 25,000 3 25,000 45,000 4 10,000 65,000 Estimated resale value at end of year 4 50,000 20,000 Profit is calculated after deducting straight line depreciation. The business has a cost of capital of 10%. a) Calculate the payback period, net present value and accounting rate of return for each project, and provide brief recommendations as to what project needs to be chosen based on the following: The Payback Period. The Accounting Rate of Return/Return on Capital Employed. The Net Present Value.
Bluestone Ltd has provided the following figures for two investment projects, only one of which may be chosen. Project A Project B £ £ Initial outlay 190,000 170,000 Profit for year 1 55,000 15,000 2 40,000 25,000 3 25,000 45,000 4 10,000 65,000 Estimated resale value at end of year 4 50,000 20,000 Profit is calculated after deducting straight line depreciation. The business has a cost of capital of 10%. a) Calculate the payback period, net present value and accounting rate of return for each project, and provide brief recommendations as to what project needs to be chosen based on the following: The Payback Period. The Accounting Rate of Return/Return on Capital Employed. The Net Present Value.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Bluestone Ltd has provided the following figures for two investment projects, only one of which may be chosen.
| Project A | Project B | ||
| £ | £ | ||
| Initial outlay | 190,000 | 170,000 | |
| Profit for year 1 | 55,000 | 15,000 | |
| 2 | 40,000 | 25,000 | |
| 3 | 25,000 | 45,000 | |
| 4 | 10,000 | 65,000 | |
| Estimated resale value at end of year 4 | 50,000 | 20,000 |
Profit is calculated after deducting straight line
a) Calculate the payback period,
-
The Payback Period.
-
The Accounting Rate of Return/Return on Capital Employed.
-
The Net Present Value.
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Please calculate the
Transcribed Image Text:Net present value (NPV) @15% cost of capital
Project
Alpha
Cash Flow
YO
-£200,000
Y1
£127,500
Y2
£107,500
Y3
£87,500
Y4
£77,500
Scrap value
£10,000
Net Present value
Project
Beta
YO
-£180,000
Y1
£53,750
Y2
£53,750
Y3
£73,750
Y4
£68,750
Com ala
65.000
Cash Flow
15% discount factor
1.000
0.8696
0.7561
0.6575
0.5718
0.5718
15% discount factor
1.000
0.8696
0.7561
0.6575
0.5718
0710
Present value
-£200,000
£110,874
£81,281
£57,531
£44,315
£5,718
£99,719
Present value
-£180,000
£46,741
£40,640
£48,491
£39,311
coro
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Can you please write the calculations step by step including the formulas. How did you calculate the Cash flow in order to calculate the cumulative cash flow after that?
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