QUESTION 1 [30]

The following 2 mutually exclusive projects (Project Maringa and Project Nelli) are available:

Year/s Cash Flows (Maringa) Cash Flows (Nelli)

0 -200 000 -20 000

1 18 000 10 000

2 28 000 9 000

3 28 000 10 000

4 300 000 8 000

NB:

a. The company requires a rate of return of 15% on its investment.

b. Salvage values for the projects are as follows:

* Project Maringa R10 000 (sold as scrap).

* Project Nelli R1 000 (sold as scrap)

1.1. Applying the payback rule, which project is more lucrative? (5)

1.2. Why would you not use this method as the sole decision tool when making a capital investment decision? Explain. (4)

1.3. If the Accounting Rate of Return (ARR) is used, which project is more viable? (5)

1.4. Determine which project is more lucrative if the NPV rule is applied (show all workings). (14)

1.5. Which method is most reliable? Why? (2)