Pearson Edexcel International A Level · Accounting (YAC11)
1 multiple-choice questions marked as you go, and 5 written questions with worked solutions. All on Project appraisal.
A company is considering two mutually exclusive projects, A and B. Project A has an NPV of \(\$15,000\) and an IRR of 18%. Project B has an NPV of \(\$20,000\) and an IRR of 15%. Both projects have the same initial investment and risk profile. The company's cost of capital is 12%. Which project should be accepted and why?
Define the term Net Present Value (NPV) and state the decision rule for accepting a single independent project based on its NPV.
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Explain the difference between the payback period and Net Present Value (NPV) in terms of their treatment of the time value of money.
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Identify and briefly explain two qualitative factors that a board of directors should consider, in addition to numerical project appraisal results, before approving a major factory expansion.
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Zeta Ltd is evaluating a project requiring an initial investment of \(\$100,000\). The expected annual net cash inflows for the next four years are \(\$30,000\), \(\$40,000\), \(\$40,000\), and \(\$20,000\) respectively. The company uses the straight-line method for depreciation and assumes no residual value.
Required:
a) Calculate the Payback Period for the project.
b) Calculate the Accounting Rate of Return (ARR) based on the average investment.
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Delta Corp is considering a capital investment of \(\$200,000\) in new machinery. The estimated net cash flows are as follows:
Year 1: \(\$80,000\)
Year 2: \(\$90,000\)
Year 3: \(\$70,000\)
Year 4: \(\$40,000\)
The company's cost of capital is \(12\%\). (Discount factors at \(12\%\): Yr 1: 0.893; Yr 2: 0.797; Yr 3: 0.712; Yr 4: 0.636)
Required:
a) Calculate the Net Present Value (NPV) of the investment.
b) Calculate the Profitability Index of the project.
c) State whether the project should be accepted based on your NPV calculation.
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