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Investment projects the directors of bakar ltd

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Reference no: EM132504026

The directors Bakar Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new plant. The following data are available for each project:

Project1 Project2

Cost (immediate) 100000 60000

Expected annual net profit (Loss)

Year 1 29000 18000

2 (1000) (2000)

3 2000 4000

Estimated residual value of the plant 7000 6000

The business has an estimated cost of capital 10%, and uses the straight line method of depreciation for all non-current assets when calculating net profit. Neither project would increase the working capital of the business. The business has sufficient funds to meet all capital expenditure requirements.

Required:

a. Calculate for each project:

- The net present value

- The approximate internal rate of return

- The payback period

b. State which, if any, of the two investment projects the directors of Bakar Ltd should accept, and why?

Reference no: EM132504026

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