14:24 sbleds.ac.za MTN-SA LTE PBA 4807 Moduie overvew Accounting for ers Required: Answer the following question and pravide explanations and calculations for your answer Should the company drop the product line on financial grounds Question 5 25 marks John West's Used Cars plc has always hired students from the local university to wash the cars on the lot. John West is considering the purchase of an automatic car wash that would be used in place of the students. The following information has been gathered by John West's accountant to help him make a dedision on the purchase: a) Payments to students for washing cars total R15 000 per year at present b) The car wash would cost R21 000 installed, and it would have a 10-year useful ife. Jchn West uses straight-line depreciation on all assets. The car wash would have a negligble salvage value in 10 years c) Annual out-of-pocket costs associated with the car wash would be wages of students to operate the wash, keep the soap bin ful and so forth, R6 300 uities, R1 800, and insurance and maintenance, R900. d) John West now earns a return of 20% on the funds invested in his metry of used cars. He feels that he would have to eam an equivalent rate on the car wash for the purchase to be attractive. Required 1 )Determine the annual savings that would be realised in cash operating costs fthe car wash was purchased 2) Calculate the simple rate of return promised by the car wash Hint Note that this is a cost reduction project.) Wil John West acopt this project if he expects a 20% reum? 3) Calculate the payback period on the car wash. John West (who has a reputation for being something of a penny-pincher) will not purchase any equipment unless it has a payback of four years or less. Wal he purchase the car wash equipment? 4) Calculate (to the nearest whole per cent) the internal rate of retun promised by the car wash. Based on this calculation, does it appear that the simple rate of return would nomalily be an aoourate guide in investment decisions? Please ignore taxes END OF ASSIGNMENT 2 Page 17 of 17 D UNISA Graduate School of Business Leadership