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Question 4 (Approximate completion time: 30 mins) [CLO 6] (Total 25 marks) Sanju is considering...

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Accounting

Question 4 (Approximate completion time: 30 mins) [CLO 6] (Total 25 marks)

Sanju is considering investing in one of three projects: Smart Investor, Smart Plus and Smart Class with initial investments of $300,000, $250,000 and $350,000 respectively. Each project is expected to have a life of five (5) years and an ending book value of $150,000. The expected profits generated by the projects are as follows:

Profits after tax and depreciation

Smart

Investor

Smart

Plus

Smart

Class

$

$

$

90,000

30,000

40,000

90,000

60,000

80,000

65,000

120,000

160,000

55,000

33,000

44,000

90,000

57,000

76,000

390,000

300,000

400,000

  1. Please assist Sanju in deciding which project to invest in by calculating:

  1. the average profits for each project. (6 marks)

  2. the average capital for each project. (6 marks)

  3. the accounting rate of return (ARR) on initial capital for each project.

(6 marks)

  1. the accounting rate of return (ARR) on average capital for each project.

(6 marks)

  1. Based on your calculations, which Project would you recommend Sanju to invest in?

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