A company is considering a capital investment proposal where twoalternatives involving differing degrees of mechanisation, arebeing considered. Both investments would have a five-year life. InOption 1 new machinery would cost £278,000, and in Option 2£805,000. Anticipated scrap values after 5 years are £28,000 and£150,000 respectively. Depreciation is provided on a straight linebasis. Option 1 would generate annual cash inflows of £100,000, andOption 2, £250,000. The cost of capital is 15%. Required:
Calculate for each option:
(i) the payback period
(ii) the accounting rate of return, based on average bookvalue
(iii) the net present value
(iv) the internal rate of return.
