QUESTION $5$

$(20$ MARKS$)$

Note: Where discount factors are required, use only the present value tables $($Appendix $1$ and $2)$ that appear after the formula sheet.

REQUIRED

Study the information given below and answer the following questions:

$5\mathrm{.}1$

Determine the Net Present Values of the two investment alternatives. $($Show the calculations of the present values as well as the net present values.$)$

$(9$ marks$)$

$5\mathrm{.}2$

If both the net present values were negative, what advice would you offer Mustek Limited?

$(1$ mark$)$

$5\mathrm{.}3$

Calculate the Accounting Rate of Return on average investment of Option $2($expressed to two decimal places$).$

$(5$ marks$)$

$5\mathrm{.}4$

Calculate the Internal Rate of Return $($expressed to two decimal places$)$ of Option $1.$ Your answer must include two net present value calculations $($using consecutive rates$/$percentages$)$ and interpolation.

$(5$ marks$)$

INFORMATION

Mustek Limited is planning a new business venture. With R$3000000$ available funds to invest, it is investigating two options:

Option $1$ is to acquire an exclusive contract to operate vending machines in municipal offices in a city for four years. The contract requires the firm to pay the city R$2000000$ cash at the beginning. A once off payment of R$300000$ is also required at the beginning for transportation and installation. The firm expects cash revenues from the operation to be R$1800000$ per year and cash expenses to be R$1000000$ per year.

Option $2$ is to operate a printing shop in a busy shopping mall. This option would require the company to spend R$2700000$ for printing equipment that has an estimated useful life of four years, with a R$400000$ salvage value. The cash revenues are expected to be R$2600000$ per year and cash expenses are expected to be R$1700000$ per year.

Mustek Limited uses the straight$-$line method of depreciation. The company$$s cost of capital is $12\%.$