The following data are given for two mutually exclusive project proposals: (PhP) Project A Project B Initial Investment 50,000

a) Computation of the accounting rate of return (ARR) for project A:-

Average annual cash flows = ($15,000 + $14,000 + $12,000 + $12,000 + $12,000) / 5

= $65,000 / 5

= $13,000

ARR = Average annual cash flows / Initial investment

= $13,000 / $50,000

= 26%

Computation of the accounting rate of return (ARR) for project B:-

Average annual cash flows = ($30,000 + $14,000 + $10,000 + $10,000 + $10,000) / 5

= $74,000 / 5

= $14,800

ARR = Average annual cash flows / Initial investment

= $14,800 / $60,000

= 24.67%

b) Accounting payback:

• Project A = 3.75 years
• Project B = 3.60 years

c) Net present value:

• Project A = -$10,223.77
• Project B = -$10,649.43

d) Internal rate of return:

• Project A = 9.89%
• Project B = 9.50%

e) Discounted payback period can not be calculated for both project because the cash flows will not recover in given period.

f) Profitability index:

• Project A = 0.80
• Project B = 0.82

None of project should be undertaken because the NPV is negative, IRR is less than the required return & PI is less than 1. So, both the project should not be accepted.