Johnson & Co is a medium sized company that is engaged in delivery services. As a result of the

recent increase in the demand for services, the Managing Director $($MD$)$ is planning for the future

business performance. The MD plans to acquire a delivery van at the cost of GH$85,000.$ The

expected net cash flow per year are as follows:

Year $1,$ Ghc $25000$

Year $2,$ Ghc $28000$

Year $3,$ Ghc $39000$

Year $4,$ Ghc $34000$

Year $5,$ Ghc $24000$

The Sales Manager has indicated to the MD that he will recoup his investment in less than four

years and for that reason, it$$s a good investment.

The Management Accountant has however drawn his attention to the fact that the manager has not

factored time value of money and the cost of capital in his analysis. He could not however suggest

the cost of capital since financial institutions are charging different interest rates.

Required:

i$)$ Calculate the cost of capital when used would result in a break$-$even, when the

useful life of the van is five years with residual value of GH$8,500.$

ii$)$ Using TWO $(2)$ points each, compare and contrast the payback method of

investment appraisal and the discounted cash flow method.