QUESTION THREE $[25]$

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

Project RBS $304$ Project SMR $105$

Investment required R $85000$ R $80000$

Expected economic lifetime $6$ years $6$ years

Minimum required rate of return $12\%12\%$

Net annual cash inflows

$1$st year R $20000$ R $22000$

$2$nd year R $22000$ R $22000$

$3$rd year R $24000$ R $22000$

$4$th year R $26000$ R $22000$

$5$th year R $23000$ R $22000$

$6$th year R $21000$ R $22000$

Required:

$3\mathrm{.}1$ Use the Net Present Value $($NPV$)$ method to determine which project Elmarie Ltd should

choose. $(14)$

$3\mathrm{.}2$ Describes the merits of using the NPV method. $(4)$

$3\mathrm{.}3$ Calculate the Payback Period for both projects and discuss an advantage of using this

method. $(5)$

$3\mathrm{.}4$ Discuss a disadvantage of using the Accounting Rate of Return Method. $(2)$