Sweetpea Ltd has a choice of two projects to invest in. The following details relate to these projects:
                                                                Project Raisins            Project Chocolate chips
Investment required                            R 85 000                            R 80 000
Expected economic lifetime                  6 years                                  6 years
Minimum required rate of return         12 %                                       12 %

Net annual cash inflows
1st year                                                      R 20 000                           R 22 000
2nd year                                                     R 22 000                            R 22 000
3rd year                                                      R 24 000                              R 22 000
4th year                                                       R 26 000                              R 22 000
5th year                                                     R 23 000                                R 22 000
6th year                                                      R 21 000                                R 22 000

Required:
1 Use the Net Present Value (NPV) method to determine which project Sweetpea Ltd should  choose. (14)
2 Outline the merits of using the NPV method. (4)
3 Calculate the Payback Period for both projects and discuss an advantage of using this method.
4 State a disadvantage of using the Accounting Rate of Return Method. (2)

Answer rating: 100% (QA)

Net Present Value NPV The NPV method is a capital budgeting technique used to analyze the profitability of a project or investmentIt discounts all fut... View the full answer