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A company is considering a capital investment proposal where two alternatives involving differing degrees of mechanisation,...

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Accounting

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.

Answer & Explanation Solved by verified expert
3.7 Ratings (612 Votes)
Answer to Requirement1Option1Payback Period Initial Investment Annual Cash InflowPayback Period 278000 100000Payback Period 278 yearsOption2Payback Period Initial Investment    See Answer
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