QUESTION THREE $[25]$

Laker 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: $3\mathrm{.}1$ Use the net present value method to determine which project Laker Ltd should choose. Show all workings $(19)$

$3\mathrm{.}2$ Justify why the net present value method $($NPV$)$ is favoured over the payback period. $(6)$

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

$2$

Period

$12\%$

$1$

$0\mathrm{.}893$

$2$

$0\mathrm{.}797$

$3$

$0\mathrm{.}712$

$4$

$0\mathrm{.}636$

$5$

$0\mathrm{.}567$

$6$

$0\mathrm{.}507$

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

Period

$12\%$

$1$

$0\mathrm{.}893$

$2$

$1\mathrm{.}690$

$3$

$2\mathrm{.}402$

$4$

$3\mathrm{.}037$

$5$

$3\mathrm{.}505$

$6$

$4\mathrm{.}111$