Question: QUESTION 5 Note: Where applicable, use the present value tables provided in APPENDICES 1 and 2 that appear after QUESTION 5. REQUIRED Use the information
QUESTION 5
Note: Where applicable, use the present value tables provided in APPENDICES 1 and 2 that appear after QUESTION 5.
REQUIRED
Use the information provided below to answer the following questions:
5.1 Calculate the Payback Period of Machine A (expressed in years, months and days.) (3 marks)
5.2 Calculate the Accounting Rate of Return on average investment of Machine A (expressed to two decimal places). (4 marks)
5.3 Calculate the Net Present Value (NPV) of both machines. (6 marks)
5.4 Based on the Net Present Value, which machine should Aspen Limited purchase? Why? (1 mark)
5.5 Calculate the Internal Rate of Return (IRR) of Machine B (expressed to two decimal places). Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation. (6 marks)
INFORMATION
Aspen Limited intends purchasing a new machine and has the option of purchasing Machine A or Machine B.
The following details apply. Ignore taxes.
| Machine A | Machine B | |
| Purchase price | R500 000 | R500 000 |
| Expected useful life | 4 years | 4 years |
| Scrap value | 0 | 0 |
| Depreciation per year | R125 000 | R125 000 |
| Minimum required rate of return | 12% | 12% |
| Expected net cash inflows | ||
| Year 1 | ? | R180 000 |
| Year 2 | ? | R180 000 |
| Year 3 | ? | R180 000 |
| Year 4 | ? | R180 000 |
| Expected net profit | ||
| Year 1 | R15 000 | ? |
| Year 2 | R35 000 | ? |
| Year 3 | R95 000 | ? |
| Year 4 | R75 000 | ? |
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