ASANTA Ghana Ltd is considering investing in the following projects which are considered mutually exclusive:
ASANTA Ghana Ltd uses the straight line method of depreciation. However, tax-allowable depreciation is 30% on straight line basis. The cost of capital for the company is 20% per annum.
(Note: In each case, advise the Company on which of the projects to implement or undertake.)
Required:
i) Calculate the Accounting Rate of Return for each project. (4 marks)
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Decision: PROJECT GO gives the highest Rate of return and should be selected.
ii) Calculate the Net Present Value (NPV) for each project. (4 marks)
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Decision:
Both projects produced positive NPVs but project GO has the highest NPV and should be selected since both projects are mutually exclusive.
iii) Compute the Internal Rate of Return (IRR) for each project. (4 marks)
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Decision:
Both projects give IRR above the 20% cost of Capital, Project GO gives the highest 32% and should be taken since the two projects are mutually exclusive