QUESTION $5$

Show all calculations for each entry

$(20$ Marks$)$

Note: Where discount factors are required, use only the present value tables $($Appendix $1$ and $2)$ that appear after QUESTION $5.$

$5\mathrm{.}1$

REQUIRED

From the information provided below which project would you recommend? Substantiate your answer by showing the relevant calculations that take the time value of money into account. Note: The IRR is not required.

$(8$ marks$)$

INFORMATION

MK Enterprises has R$200000$ which it will invest if the investment earns atleast $16\%$ per annum. Three projects are being considered, each of which will cost R$200000$ to commence.

Project $x$ would eam R$220000$ at the end of the first year.

Project $Y$ would eam R$250000$ at the end of the second year.

Project Z would earn R$120000$ at the end of the first year and R$125000$ at the end of the second year.

$5\mathrm{.}2$

REQUIRED

Study the information given below to determine whether the company should accept the investment opportunity or not. M$$tivate your answer by calculating the Accounting Rate of Return on average investment $($expressed to two decimal places$).$

$(5$ marks$)$

INFORMATION

Universal Limited is a manufacturing company and its management is appraising the production and sale of a new product. This would involve the purchase of a new machine with a cost price of R$1200000$ and an expected scrap$/$salvage value of R$200000.$The net cash flows from the machine are estimated to be $R300000$ per year for eight years. Depreciation is expected to be R$125000$ per year. The company's cost of capital is $18\%.$

$5\mathrm{.}3$

REQUIRED

Use the information given below to answer the following questions:

$5\mathrm{.}3\mathrm{.}1$ Calculate the Internal Rate of Return $($expressed to two decimal places$).$ Your answer must include two net present value calculations $($using consecutive cost of capital rates$)$ and interpolation.

$(6$ marks$)5\mathrm{.}3\mathrm{.}1$ Calculate the Internal Rate of Retum $($expressed to two decimal places$).$ Your answer must include two net present value calculations $($using consecutive cost of capital rates$)$ and interpolation.

$(6$ marks$)$

$5\mathrm{.}3\mathrm{.}2$ Based on the IRR should the company consider purchasing the machine? Why?

$(1$ mark$)$

INFORMATION

Venus Limited is investigating an opportunity to purchase a machine for R$640000.$ The machine is expected generate net cash flows of R$180000$ per annum for five years. The company's cost of capital is $16\%.$