QUESTION 5 (20 Marks)

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

QUESTION 5. REQUIRED Study the information provided below and calculate the following:

5.1 Payback Period of both projects (expressed in years, months and days). (6 marks)

5.2 Accounting Rate of Return on average investment of Project A (expressed to two decimal places). (3 marks)

5.3 Net Present Value of both projects. Your answer must include the calculations of the present values and NPV. (6 marks)

5.4 Internal Rate of Return of Project B (expressed to two decimal places).

Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation. (5 marks)

INFORMATION

The following information relates to two capital investment projects that are under consideration by Alpha Limited.

		Project A	Project B
initial Cost		R600 000	R600 000
Expected Life		5 Years	5 Years
scrap value		0	0
Expected net profit		R	R
Year 1		80 000	70 000
Year 2		70 000	70 000
Year 3		60 000	70 000
Year 4		50 000	70 000
Year 5		40 000	70 000

Project A Project B Initial cost R600 000 R600 000 Expected life 5 years 5 years Scrap value 0 0 Expected net profit: R R Year 1 80 000 70 000 Year 2 70 000 70 000 Year 3 60 000 70 000 Year 4 50 000 70 000 Year 5 40 000 70 000

The company estimates that its cost of capital is 12%. The straight-line method of depreciation is used. Ignore taxes.