QUESTION TWO

CAPITAL EXPENDITURE DECISIONS

$(20$ MARKS$)$

Norah Limited intends to purchase a new AI machine and has a choice between the following two AI machines:

$\backslash$table$[[,$Machine A$,$Machine B$],[$Initial cost$,$R $300000,$R $330000],[$Expected economic life,$5$ years,$5$ years$],[$Expected disposal$/$residual value,R $30000,0],[$Expected net cash inflows.,R$,$R$],[$Depreciation per year,$54000,66000]]$

The company estimates that its cost of capital is $14\%.$

REQUIRED:

$2\mathrm{.}1$ Calculate the payback period for Machine B $($answers must be expressed in years, months and days$).$

$(3$ marks$)$

$2\mathrm{.}2$ Calculate the accounting rate of return $($on average investment$)$ for Machine A$.($answer rounded off to $2$ decimal places$).$

$(4$ marks$)$

$2\mathrm{.}3$ Explain two advantages of using the accounting rate of return in capital investment appraisal.

$(2$ marks$)$

$2\mathrm{.}4$ Calculate the net present value of each machine $($round$-$off amounts to the nearest Rand$).$

$(6$ marks$)$

$2\mathrm{.}5$ Calculate the internal rate of return for Machine B$.$

$(5$ marks$)$