- Question One A State Any Two 2 Differences Between Accounting Rate Of Return And Profitability Index As Models Used I 1 (245.61 KiB) Viewed 34 times
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QUESTION ONE a) State any two (2) differences between Accounting Rate of Return and Profitability Index as Models used in Investment Appraisal (2 marks) b) State any three (3) reasons to justify the large amount of resources expended by businesses to ensure they get their Capital Budgeting decisions right (3 marks) QUESTION TWO Gyaensanom Ventures is a firm involved in Agricultural Extension Services located at Yusuwadwenkrom in the Eastern Region of Ghana. The firm expects 18% return on all new projects which must also reflect a minimum Internal Rate of Return of 25%. The firm has a new 5-year project on hand and the expected annual net cash inflows are given as below: Year 1 GH¢1,100,000 Year 2 GHC 490,000 Year 3 GH¢ 350,000 Year 4 GH¢ 350,000 Year 5 GH¢ 350,000 In his report to the Board of Directors, the Finance Officer, Mr Obeng Konadu stated that even though the firm's initial capital outlay would be GH¢1,600,000.00, he is convinced that the project is worth undertaking since its Internal Rate of Return would be in the region of 26.22% which is above the minimum requirement of the firm and therefore recommends the acceptance of the project. REQUIRED i) Calculate the Profitability Index of this project (7 marks) ii) With sufficient calculations and explanations show the extent to which you agree with the Finance Office on the 26.22% Internal Rate of Return (8 marks) (TOTAL-20 MARKS) -