04:27 B _ @ 12 .Ill 54%% Copyright reserved Please turn over 800264-250@1/122512-1116 (4090495) -9- 258Q1J1225000188 QUESTION 6 ABC Bank is considering funding one of the two farmers in a certain rural area by way of a loan. The farmers have thus provided the following information regarding the initial capital and cash flows of their intended projects. Farmer 1 Farmer 2 Initial capital R400 000 R600 000 investment Annual cash flows: Year 1 R80 000 R100 000 Year 2 R90 000 R100 000 Year 3 R100 000 R250 000 Year 4 R140 000 R250 000 Salvage value R40 000 R60 000 6.1 The bank decides to evaluate the projects of the farmers based on the payback period. 6.1.1 Calculate the payback periods of the two farmers above. O (8) 6.1.2 Which farmer will be funded by the bank if it was to choose a farmer with less risky cash flows? (1) 6.1.3 Justify your answer in QUESTION 6.1.2 above. (2) 6.2 The bank decides to evaluate the projects by the farmers based on the rate of return. 6.2.1 Calculate the internal rates of return of the two farmers above. (11) 6.2.2 Which farmer will be funded by the bank if it was to choose a farmer with a more profitable project? (1) 6.2.3 Justify your answer in QUESTION 6.2.2 above. (2) 6.3 Tabulate any THREE disadvantages of payback period and any THREE disadvantages of internal rate of return. (6) 6.4 The concept of break-even is important in farming and cannot be ignored in decision-making. 6.4.1 Briefly explain the concept of break-even. O (2) 6.4.2 Give the formula for calculating break-even point. (3 ) Copyright reserved Please turn over 20809284-2580141 22512-1316 258Q1J1225000188 7 of 8 O