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Question 5 a) Compare and contrast 'Accounting Rate of Return' and 'Net Present Value'. [4...

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Question 5 a) Compare and contrast 'Accounting Rate of Return' and 'Net Present Value'. [4 marks] b) Crest Ltd wants to purchase a new machine to increase their production. The following information relates to the new machine: Cost of machine - 665,000 Useful life 4 years Residual value - 165,000 Depreciation method - Straight line Year Accounting Profit '000 01 50 02 60 03 70 04 40 The company's cost of capital is 10%. Ignore taxation and inflation. Required: Calculate the return the new machine would make, using each of the following investment appraisal methods, and recommend on a purely financial basis whether Crest Ltd should go ahead with the purchase. I. Accounting Rate of Return (ARR) ii. Payback Method iii. Net Present Value (NPV) iv. Internal Rate of Return (IRR) [16 marks)

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