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1. CAPITAL INVESTMENT DECISIONS

The following information relates to three possible capital expenditure projects. Because of capital rationing only one project can be accepted.

	Project A	Project B	Project C
Initial Cost	$240,000	$260,000	$200,000
Expected life	5years	5 years	4 years
Scrap value expected	$10,000	$15,000	$10,000
Expected Cash Inflows:	$	$	$
End Year 1	85,000	95,000	45,000
End Year 2	70,000	70,000	65,000
End Year 3	65,000	55,000	95,000
End Year 4	60,000	50,000	100,000
End Year 5	50,000	50,000

The company estimates cost of capital is 18%. The table below shows the present value of $1 at 14%, 18% and 22%.

Periods	14%	18%	22%
1	0.877	0.847	0.820
2	0.769	0.718	0.672
3	0.675	0.609	0.551
4	0.592	0.516	0.451
5	0.519	0.437	0.370
6	0.456	0.370	0.303
1	0.877	0.847	0.820
2	0.769	0.718	0.672
3	0.675	0.609	0.551
4	0.592	0.516	0.451
5	0.519	0.437	0.370
6	0.456	0.370	0.303

1. The net present value for each project

(5 marks)

2. The internal rate of return

(4 marks)

3. Which project should be accepted give reasons.

(3 marks)

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4. Explain the factors that management would need to consider in addition to the financial factors before making a final decision on a project.

(3 marks)

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