5

QUESTION 5 (20 Marks)

Note: Where applicable, use the present value tables provided in APPENDICES 1 and 2 that appear

after QUESTION 5.

REQUIRED

Use the information given below to calculate the following:

5.1 Payback Period of both projects (expressed in years, months and days) (6 marks)

5.2 Net Present Value of both projects (6 marks)

5.3 Accounting Rate of Return (on average investment) of Project Ron (expressed to two

decimal places) (3 marks)

5.4 Internal Rate of Return (IRR) of Project Hob. Your answer must include the calculation

of two net present values as well as the determination of the IRR expressed to two

decimal places. (5 marks)

INFORMATION

Trendy Manufacturers is investigating the possibility of investing in one of two projects. The net cash flows

for the two competing investment opportunities are as follows:

Year Project Ron Project Hob

1 R560 000 R340 000

2 R500 000 R340 000

3 R400 000 R340 000

4 R200 000 R340 000

5 R50 000 R340 000

Each project requires an initial investment of R1 200 000. A scrap value of R50 000 (not included in the

figures above) is expected for Project Ron only. The required rate of return is 12%. The estimated average

annual profits of Project Ron and Project Hob are R112 000 and R100 000 respectively.