Investment projects the directors of bakar ltd

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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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