QUESTION TWO (20 Marks)

REQUIRED
Study the information provided below and answer the following questions:
2.1	Calculate the Payback Period of both projects (answers expressed in years, months and days.) Which project would you choose on the basis of payback period? Why?
		(6 marks)
2.2	Calculate the Accounting Rate of Return for both projects (answer expressed to two decimal places).
		(6 marks)
2.3	Calculate the Net Present Value for both projects. (Round off amounts to the nearest Rand.)	(6 marks)
2.4	Based on your calculations from 2.1 2.3, which project should Rothmans Limited choose? Why? .	(2 marks)

INFORMATION

The following information relates to two projects under consideration by Rothmans Limited:

		Project A	Project B
Initial cost		R1 555 000	R1 550 000
Expected life		7 years	7 years
Expected scrap value		0	0
Expected net cash flows:		R	R
End of year	1	450 000	420 000
2		420 000	420 000
3		400 000	420 000
4		200 000	420 000
5		180 000	420 000
6		350 000	420 000
7		450 000	420 000

The company estimates that its cost of capital is 13%.