Sanju is considering investing in one of three projects: Smart Investor, Smart Plus and Smart Class with initial investments of $300,000, $250,000 and $350,000 respectively. Each project is expected to have a life of five (5) years and an ending book value of $150,000. The expected profits generated by the projects are as follows:
Profits after tax and depreciation
Smart
Investor
Smart
Plus
Smart
Class
$
$
$
90,000
30,000
40,000
90,000
60,000
80,000
65,000
120,000
160,000
55,000
33,000
44,000
90,000
57,000
76,000
390,000
300,000
400,000
Please assist Sanju in deciding which project to invest in by calculating:
the average profits for each project. (6 marks)
the average capital for each project. (6 marks)
the accounting rate of return (ARR) on initial capital for each project.
(6 marks)
the accounting rate of return (ARR) on average capital for each project.
(6 marks)
Based on your calculations, which Project would you recommend Sanju to invest in?
Answer & Explanation
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