2017: Question 4

4.1 Gigabyte Enterprises has the option to invest in machinery in projects A and B but finance is only available to invest in one of them. You are given the following projected data:

	Project A (R)	Project B (R)
Initial Cost	450 000	450 000
Net Profit:
Year 1 Year 2 Year 3 Year 4 Year 5	36 000 75 000 102 000 129 000 81 000	69 000 69 000 69 000 69 000 69 000

Additional information: 1. All cash flows take place at the end of the year except the original investment in the project which takes place at the beginning of the project. 2. Project A machinery will be disposed of at the end of year 5 with a scrap value of R60 000. 3. Project B machinery will be disposed of at the end of year 5 with a nil scrap value. 4. Depreciation is calculated on a straight-line basis. 5. The discount rate to be used by the company is 12%.

Required Use the information provided by Gigabyte Enterprises to answer the following questions: 4.1.1 Calculate the payback period for project B. (Answer must be expressed in years and months) (3 marks) 4.1.2 Calculate the accounting rate of return (on average investment) for project A. (Answer must be expressed to two decimal places) (4 marks) 4.1.3 Calculate the net present value of each project. (Round off amounts to the nearest Rand. (6 marks) 4.1.4 Using your answers from question 4.1.3, which project should be chosen? Why? (2 marks)

4.2 A machine with a purchase price of R420 000 is estimated to eliminate manual operations and save the company R129 000 cash per year. The machine will last 5 years and have no residual value at the end of its life.

Required Calculate the internal rate of return. (5 marks)