ACCOUNTING & FINANCE.

ACCOUNTING & FINANCE
STUDENT ID:
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a) Payback period computation (Project A)
Initial investment = $ 250,000
Total amount of cashflows in three years = 90,000 + 80,000 + 75,000 =$ 245,000
Remaining investment to be recovered =$ 250,000- $ 245,000 = $ 5,000
Time in fourth year required to recover remaining investment = (5000/60000) = 0.083
Payback Period = 3 + 0.083 = 3.08 years
Payback period computation (Project B)
Initial investment = $ 260,000
Total amount of cashflows in three years = 120,000 + 90,000 =$ 210,000
Remaining investment to be recovered =$ 260,000- $ 210,000 = $ 50,000
Time in third year required to recover remaining investment = (50000/80000) = 0.625
Payback Period = 2 + 0.625 = 2.63 years
b) ARR computation (Project A)
Average profit = (40,000+30,000+25,000+5,000+5,000)/5 = $21,000
Average investment = (250,000 +10,000)/2 = $130,000
ARR = (Average profit/Average investment)*100 = (21000/130000)*100 = 16.15%
ARR computation (Project B)
Average profit = (60,000+40,000+30,000+5,000+5,000)/5 = $28,000
Average investment = (260,000 +25,000)/2 = $142,500
ARR = (Average profit/Average investment)*100 = (28,000/142,500)*100 = 19.65%