Sporting Company is considering three investment opportunities X, Y and Z. Straight-line depreciation will be used in each case, and the salvage value will be received at the end of the life of the investment. In estimating the periodic net incomes of each project, the only non-cash item is depreciation. The following information is available about these investments:

Investment	X		Y		Z
Purchase price	R40 000		R40 000		R40 000
Useful life	6 years		8 years		8 years
Salvage value	R1 000		R-0-		R10 000
Expected net incomes:
Year 1	R3 500		R11 000		R(3 750)
Year 2	3 500		9 000		4 250
Year 3	3 500		7 000		8 250
Year 4	3 500		5 000		16 250
Year 5	3 500		3 000		(1 750)
Year 6	3 500		1 000		(1 750)
Year 7	-0-		(1 000)		(1 750)
Year 8	-0-		(3 000)		21 250
Total income	R21 000		R32 000		41 000

Required:

Rank the three investments, first is best, third is worst, based on the following:

Payback periods, assuming the cash flows from each investment are spread evenly throughout each period. (10 marks)

Return on average investment, assuming the cash flows from each investment are spread evenly throughout each period. (10 marks)

Net present values, using 8% per year as the discount rate. For this purpose, assume that the cash flows each year are received at the end of the year. (15 marks)

What would the result be of Investment Opportunity Y if the tax rate was 30%?

Answer rating: 100% (QA)

SOLUTION 1 Payback periods Investment X Payback period 6 years cash inflows are R3500 per year for 6 ... View the full answer