QUESTION ONE $[20]$

$1\mathrm{.}1.$ Smiles R$$Us have just made an investment of R$420000$ in the latest, most advanced

dental machine on the market, details of which are below:

$$ Expected useful life $7$ years $($straight line depreciation$)$

$$ Salvage value $240000$

$$ Cost of Capital $10\%$

$$ Tax rate $30\%$

$$ Expected cash flows after tax are as follows:

Year Cash Flows Discount factor

$1750000\mathrm{.}909$

$2950000\mathrm{.}826$

$31250000\mathrm{.}751$

$41800000\mathrm{.}683$

$52000000\mathrm{.}621$

$62200000\mathrm{.}564$

$72400000\mathrm{.}513$

Required:

$1\mathrm{.}1\mathrm{.}1$ Calculate the payback period for the project. $(6)$

$1\mathrm{.}1\mathrm{.}2$ Determine the Net Present Value $($NPV$)$ of the project. $(8)$

$1\mathrm{.}2$ SNJ Wholesalers Limited is considering opening a new sales branch. Two possible sites

have been identified for this purpose. Site A has an area of $30000$ square metres. It will

require an average investment of R$6000000$ and will produce an average operating profit of

R$600000$ a year. Site B has an area of $20000$ square metres and it will require an an

average investment of R$4000000$ and will produce an average operating profit of R$500000$

a year.

Required:

$1\mathrm{.}2\mathrm{.}1$ Determine the accounting rate of return of each investment opportunity. $(4)$

$1\mathrm{.}2\mathrm{.}2$ Which site would you select and why? $(2)$