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Question 3 [18 marks] Kenin Kosmetics is considering a new project. There are two proposals and only one can be accepted. Each initial outlay involves the purchase of a non-current asset with useful economic life of 3 years. Data relating to the proposals are as follows: Proposal 1 Proposal 2 Year Cash flows Initial investment (£165,000) (£88,000) Year 1 £115,000 (£6,000) Year 2 (£8,000) £103.000 Year 3 £85,000 £62,000 Residual (scrap) value £3,000 £4,000 Notes: • The company uses the straight-line method of depreciation. • Residual value mentioned is expected at the end of the economic useful life. • The cash flows for year 3 do not include, where applicable, the expected proceeds from the disposal of the non-current asset at residual value. PLEASE TURN OVER

Required: a) Calculate the Payback period for: Proposal 1 Proposal 2 (2 marks) (2 marks) b) Based on the payback period calculations, advise Kenin Kosmetics on which proposal to accept stating the reason why. (1 mark) c) Calculate the Accounting rate of return (ARR) for. Proposal 1 Proposal 2 (5 marks) (5 marks) d) Based on the Accounting rate of return (ARR) calculations, advise Kenin Kosmetics on which proposal to accept stating the reason why. (1 mark) e) Provide one (1) advantage and one (1) disadvantage of Accounting rate of return (ARR) as an investment appraisal technique (2 marks) PLEASE TURN OVER