Question 5

Use the information provided to answer the questions.

5.1 Use the information provided below to calculate the following. Where applicable, use the present value tables provided in APPENDICES 1 and 2 that appear after QUESTION 5.

5.1.1 Calculate the Payback Period of Project A (expressed in years, months and days). (3 marks)

5.1.2 Calculate the Accounting Rate of Return (on average investment) of Project B (expressed to two decimal places). (5 marks)

5.1.3 Calculate the Net Present Value of each project (with amounts rounded off to the nearest Rand). (6 marks)

5.1.4 Use your answers from question 5.1.3 to recommend the project that should be chosen. Motivate your choice. (1 mark)

INFORMATION

Zeda Enterprises has the option to invest in machinery in projects A and B but finance is only available to invest in

one of them. You are given the following projected data:

	Project A	Project B
Initial cost	R300 000	R300 000
Scrap value	R40 000	0
Depreciation per year	R52 000	R60 000
Net Profit
Year 1	R20 000
Year 2	R30 000
Year 3	R50 000
Year 4	R60 000
Year 5	R10 000
Net cash flows
Year 1		R90 000
Year 2		R90 000
Year 3		R90 000
Year 4		R90 000
Year 5		R90 000

Additional information

The discount rate used by the company is 12%.

5.2 Use the information provided below to calculate the Internal Rate of Return (expressed to two decimal places) using interpolation. (5 marks)

INFORMATION

A machine with a purchase price of R1 200 000 is estimated to eliminate manual operations by R400 000 per year.

The machine is expected to have a useful life of four years.

APPENDIX 1: PRESENT VALUE OF R1

APPENDIX 2 : PRESENT VALUE OF A REGULAR ANNUITY OF R1 PER PERIOD FOR N PERIODS