Expert QA Done 2Rural poultry farm costs 5000000 to set up a

Expert Q&A; Done 2-Rural poultry farm costs 5,000,000 to set up and has a scrap value of 1,000,000. Its stream of income before depreciation and taxes during the first five years is 1,000,000, 1,200,000, 1,400,000, 1,600,000 and 2,000,000. If depreciation is 800000 and tax rate is 50%, calculate the accounting rate of return 3-Company C is planning to execute a project requiring initial investment of S105 million. The project is expected to generate $25 million per year for 7 years. Calculate the payback period of the project. Company C is planning to undertake another project requiring initial investment of S50 million and is expected to generate $10 million in Year 1, S13 million in Year 2, $16 million in year 3, S19 million in Year 4 and $22 million in Year 5. Calculate the payback value of the Using payback period, determine which is a better investment, Project A? or Project B? Support your answer with your computation and explain the limitations of using payback 4 plant and machinery investment with cost of $8,320 thousand cash inflows will be $3.411. $4,070, $5,824 and $2,065 at the four years project life. At the end of the project the machinery will be sold for $900 what will be the net present value of the project if the discount rate is 18%?

Solution

2. Accounting rate of return

Accounting rate retun = Average return during the period/ Average Investment

= 1000000+200000+300000+400000+600000/5=320000

   = 5000000/5 = 1000000

ARR    = 320000/1000000

   = 32%

3.( a) Payback period

   Initial Investment = 105 m

   Annual cash flows = 25 m

   Payback period = 105/25

= 4.2 that is 4 year 2 month and 12 days

b) Intial Investment = 50

year 1 cash flow = 10

Balance = 40

   Year 2 cash flow= 13

   Balance = 27

   Year 2 cash flow= 16

Balance = 11

19 million cash flow generated in year 3, this is 12 months total income, hence no. months needed to generate 11 million = 12/19 x 11= 6.94 that is 6 month and 28 days

Hence total payback period is 2 year, 6 month and 28 days

From the above we can conclude that Project B is better becuse it has a lesser payback perod

LIMITATIONS USING PAYBACK METHOD.

*. One of the main drawback is that this method does not considering the time value of money

*. The payback method not considering the cash fows effecting after the payback period

*. This method can be used only in preliminary evaluations. For making better comparisons we have to follow NPV method or IRR method

4. NPV of the project

	Year1	2	3	4	5
Income before Depreciation and tax	1000000	1200000	1400000	1600000	2000000
Depreciation	800000	800000	800000	800000	800000
Profit before tax	200000	400000	600000	800000	1200000
Tax @ 50%	100000	200000	300000	400000	600000
Profit after tax	100000	200000	300000	400000	600000