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A company is considering the following investment project:
Capital outlay $200,000
Net Profit p.a. (before depreciation and tax) $ 90,000
Depreciation p.a. $ 40,000
Economic life: 5 years
Salvage value: Zero
Tax rate payable (assume paid in year of income): 30%
Required rate of return: 12% (WACC + Risk factor)
Assessment Task: Calculate the following:
(i) The Net Profit After Tax for each year.
(ii) The Annual Cash Flow for each year.
(iii) Accounting Rate of Return (using total investment).
(iv) Payback Period.
(v) Net Present Value.
(vi) Internal Rate Of Return
Evaluating projects on an Independent Basis (rather than Mutually Exclusive) and using NPV evaluation method would mean:
Choose the individual project with the highest NPV (Net Present Value).
(ii) Choose the individual project with the highest ARR.
(iii) Choose all projects with a positive NPV.
(iv) Choose all projects with an ARR greater than the W.A.C.C.
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