QUESTION $2$

$(25$ MARKS$)$

A machine of R$1500000$ is required on project Alpha. The accounting policy requires that specialised machinery be depreciated on the straight$-$line method over a period of five years and that the asset$$s residual value be calculated at $10\%$ of the original cost. The company is taxed at $27\%.$ At the cost of $10\%,$ the machine will generate the following cashflows:

Cashflows

Year $1$

R$350000$

Year $2$

R$190000$

Year $3$

R$150000$

Year $4$

R$400000$

Year $5$

R$600000$

Required:

$2\mathrm{.}1$ Calculate the payback period of the investment in the specialised machine and determine whether management should accept the investment given that similar projects have a $48-$month

$(5$ Marks$)$

settlement period. Your answer should be presented as a number of years, months and days.

$2\mathrm{.}2$ Calculate the project$$s Net Present Value and establish whether the project is viable.

$(5$ Marks$)$

$2\mathrm{.}3$ Assess whether the projects Accounting Rate of Return will meet the shareholder$$s expectation of $35\%.$

$(10$ Marks$)$

$2\mathrm{.}4$ Evaluate whether a residual value change from the current $10\%$ to a proposed $20\%$ would affect the Accounting Rate of Return on this investment positively.