Answer to Question #233379 in Economics for Symbol

Question

A company is considering two four-year capital expenditure proposals for similar products, only one of which can be accepted. The available information is;

PA. PB

initial investment 46000. 46000

profit year 1. 6500. 4500

profit year 2. 3500. 2500

profit year 3 13500. 4500

year 4. (loss) (1500). Profit(14500)

estimated scrap value

end year; 44000. 4000

depreciation is charged on the straight line basis. The company estimates its cost of capital at 20% p.a.

REQUIRED;

For each proposal A and B, calculate:

-the payback period

-the average rate of return on initial investment

-net present value

• what are the advantages of each method
• what impact can inflation have on investment capital

Answer 1

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