Alpha Ltd is considering a capital investment proposal where two alternatives, involving differing degrees of mechanization, are being considered. New machinery would cost Rs. 2,78,000 in option 1 and Rs. 8,05,000 in option 2. Both these investments would have a five year life, however it is anticipated that the scrap values after 5 years would be Rs. 28,000 and Rs. 1,50,000 respectively. Depreciation is provided on a straight line basis. Annual Cash Inflows, expected to be generated for option 1 is Rs. 1,00,000 and Rs. 2,50,000 for option 2. The cost of capital is 15%. You are required to calculate the following for each option:

(i) The payback period

(ii) The Accounting rate of return, based on average book value

(iii) The Net Present Value

(iv) The Internal Rate of Return.

As a Manager which option you would prefer, give reasons for your preference.

As a manager, it is essential to evaluate the capital investment proposals carefully to determine the best option for Alpha Ltd. Let's analyze the two alternatives (Option 1 and Option 2) using various financial metrics:

1. Payback Period:
The payback period is the time it takes to recover the initial investment. To calculate it, we will accumulate the net cash inflows until they equal or exceed the initial investment.

Option 1:
Initial Investment: Rs. 2,78,000
Annual Cash Inflow: Rs. 1,00,000

Payback Period for Option 1 = Initial Investment / Annual Cash Inflow
Payback Period for Option 1 = Rs. 2,78,000 / Rs. 1,00,000 = 2.78 years

Option 2:
Initial Investment: Rs. 8,05,000
Annual Cash Inflow: Rs. 2,50,000

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