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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?
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