QUESTION FOUR $[22]$

Baker Ltd has a choice of two projects to invest in$.$ The following details relate to these projects:

Project Y Project Z

Investment required R$1700000$ R$1600000$

Expected economic lifetime $6$ years $6$ years

Minimum required rate of

return

$12\%12\%$

Net annual cash inflows

$1$

st year R$400000$ R$430000$

$2$

nd year R$420000$ R$430000$

$3$

rd year R$440000$ R$430000$

$4$

th year R$580000$ R$430000$

$5$

th year R$520000$ R$430000$

$6$

th year R$460000$ R$430000$

Required

$4\mathrm{.}1.$ Use the net present value method to determine which project Baker Ltd should

choose. $($Show all workings$).(17)$

$4\mathrm{.}2.$ Justify why the net present value method $($NPV$)$ is favoured over the payback

period. $(5)$

Present value interest factor of R$1$ per period for n periods, PVIF $($i$,$n$)$

Period $12\%$

$10\mathrm{.}893$

$20\mathrm{.}797$

$30\mathrm{.}712$

$40\mathrm{.}636$

$50\mathrm{.}567$

$60\mathrm{.}507$

Present value interest factor of an annuity of R$1$ per period for n periods, PVIFA $($i$,$n$)$

Period $12\%$

$10\mathrm{.}893$

$21\mathrm{.}690$

$32\mathrm{.}402$

$43\mathrm{.}037$

$53\mathrm{.}505$

$64\mathrm{.}111$