QUESTION 4 (25 Marks)

4.1 REQUIRED

Study the information given below and calculate the following:

4.1.1 Payback period (in years, months and days) (3 marks)

4.1.2 Net Present Value (5 marks)

4.1.3 Internal Rate of Return (expressed to two decimal places). (Note: Your answer must include the interpolation.) (6 marks)

INFORMATION

Eva Limited is considering the purchase of a machine. The company desires a minimum required rate of return of 12%. The machine will cost R2 200 000 plus installation costs of R200 000 and is expected to have a useful life of six years. It is anticipated that the machine will have a salvage value of R100 000. The machine is expected to increase revenues by R800 000 per year but will require the employment of two new machine operators at R100 000 per year for each operator, and it will also require maintenance and repairs averaging R50 000 per year. Depreciation is estimated to be R400 000 per year.

4.2 REQUIRED

Study the information given below and calculate the Accounting Rate of Return on initial investment (expressed to two decimal places) of each project. (6 marks)

INFORMATION The following data relate to two investment projects, only one of which may be selected:

	Project A	Project B
	R	R
Initial capital expenditure	180 000	180 000
Net Cash inflow per year
Year 1	90 000	36 000
Year 2	72 000	36 000
Year 3	54 000	86 000
Year 4	36 000	94 000
Expected scrap value (not included in the figures above)	36 000	0

Note:

Depreciation is calculated using the straight-line method.

The cost of capital is 15%.

4.3 REQUIRED

Use the capital asset pricing model to calculate the cost of the ordinary shares from the information provided below. (5 marks)

INFORMATION

The financial managers of Computex have the following information at their disposal:

The risk-free rate is presently 14%.

The companys beta coefficient is 0.90.

The return on the JSEs overall index is presently 20.6%.