2.2 RP Investments Ltd have just made an investment of R550 000 in new equipment.

Additional information:

• Expected useful life 5 years (straight line depreciation)
• Salvage value 50 000
• Cost of Capital 10% after tax
• Tax rate 30%

Years Cash flows

1. 220 000
2. 200 000
3. 120 000
4. 110 000
5. 50 000

Required:

2.2.1 Calculate the payback period (4) and the accounting rate of return (4). (8)

2.2.2 RP Investments Ltd requires a payback period of no more than 3 years and an accounting rate

of return of at least 30%. On the basis of these criteria, should this project be accepted? Justify

your answer. (5)

2.2.3 The payback period method makes a crucial omission in its calculation, namely the time value of money. Complete the above computation using a method that accounts for the time value of money. On the basis of this calculation, should the project be accepted? Justify your answer.