QUESTION $3$

CAPITAL BUDGETING TECHNIQUES

$(20$ MARKS$)$

Note: Where applicable, use the present value tables that appear after QUESTION $5.$

REQUIRED

Study the information given below and answer the following questions:

Calculate the Payback Period of both projects. $($Answer must be expressed in years, months

and days.$)$

Calculate the Accounting Rate of Return of Project A$.($Answers must be rounded off to $2$

decimal places.$)$

Calculate the Profitability Index of both projects. $($Answers must be expressed to $3$ decimal

places.$)$

On the basis of the profitability index, which project should be chosen? Why?

Calculate the Internal Rate of Return of Project B $($answer expressed to $2$ decimal places$).$

INFORMATION

The following information relates to two capital expenditure projects. Because of capital rationing,

only one project can be chosen.

Project $A$ is expected to have a scrap value of $R100000($not included in the figures above$).$ No

scrap value is anticipated for Project B$.$ The company estimates its cost of capital to be $12\%.$