Pearl Limited is considering upgrading its plant to expand it client base. The financial details of the
Question:
Pearl Limited is considering upgrading its plant to expand it client base. The financial details of the investment proposal are as follows: Cost of plant
R4 700 000 Import duty R 900 000 Installation cost R 450 000 Net cash flows Year 1-8 R1 700 000 per annum (excluding residual value) Residual/scrap value R1 300 000 .The company uses straight-line depreciation. The cost of capital for projects of similar risk is 18%. Ignore taxation.
Required:
1 calculate the investment’s Accounting Rate of Return (ARR).
2 Briefly explain if the ARR is acceptable or not based on a target rate of return of 25%.
3 Assume a payback period of 3 years. Determine the payback period and state if the investment is acceptable or not.
4 Calculate and comment on the viability of the proposed investment based on the net present value (NPV) method.
5 Discuss whether the advantages of using the NPV method outweigh the disadvantages.
International Financial Reporting and Analysis
ISBN: 978-1408075012
5th edition
Authors: David Alexander, Anne Britton, Ann Jorissen