Capital Project Evaluation: NPV, ARR, and Payback Analysis

This finance project evaluates two capital projects (A and B) for Te Runanganui o Ngati Porou (TRNP). The analysis includes calculating the payback period, accounting rate of return (ARR), and net present value (NPV) for each project. The solution demonstrates the step-by-step calculations for each method, considering initial costs, cash inflows, profits, and the company's cost of capital (16%). The project concludes with a recommendation on which project to accept, supported by financial reasons, and also explores non-financial factors that management should consider before making a final decision, such as long-term strategic intent and employee support. References from Arnold (2015) and Brealey, Myers & Allen (2014) are included to support the analysis.

ACCOUNTING & FINANCE
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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%

c) Net Present Value (Project A)
NPV = -$250,000 + (90000/1.16) + (80000/1.162) + (75000/1.163) + (60000/1.164) +
(55000/1.165) = - $5,587.75
Net Present Value (Project B)
NPV = -$260,000 + (120000/1.16) + (90000/1.162) + (80000/1.163) + (50000/1.164) +
(50000/1.165) = $13,005.76
d) Project B should be accepted on account of the following reasons (Arnold, 2015).
 NPV of project B is positive which implies that it is financially feasible. This is not the
case for project A whose NPV is negative.
 The payback period for project B is lower for project A.
e) The following two non-financial factors should be considered by the management before
making a decision (Brealey, Myers & Allen, 2014).
 Long term strategic intent ought to be considered keeping in consideration the underlying
strategies deployed by the key competitors.
 The support of the employees and the management is also a key factor which could
influence the decision with regards to choice of project.

References
Arnold,G. (2015). Corporate Financial Management (3rd ed.). Sydney: Financial Times
Management.
Brealey, R. A., Myers, S. C., & Allen, F. (2014). Principles of corporate finance (2nd ed.). New
York: McGraw-Hill Inc.