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[25] QUESTION TWO 2.1 Astra Ltd intend investing in a new machine. The following details relating to the machine apply: Cost of machine R360 000
[25] QUESTION TWO 2.1 Astra Ltd intend investing in a new machine. The following details relating to the machine apply: Cost of machine R360 000 Expected useful life 5 years Scrap value R 60 000 Method of depreciation Straight-line Cost of capital 12% Profit 'R' 6 000 Year 1 2 18 000 100 000 3 4 5 66 000 112 000 Required: 2.1.1 Calculate the pay-back period 2.1.2 Calculate the accounting rate of return (ARR). 2.1.3 Comment on the above returns taking into account that Astra Ltd requires a payback period of 3 years and a return of at least 40%. (8) (5) (2) 2.2 The following information relates to two projects, Project Alpha and Project Omega from which one must be chosen by Delta Construction Ltd. After-tax cash flows: Year Project Alpha R 1 0 Project Omega R 72 000 72 000 72 000 72 000 2 37 000 3 72 400 4 246 000 Both projects require an initial investment of R235 400 and the cost of capital is 12%. As the project manager of Delta Construction Ltd. you are required to: 2.2.1 Calculate the Net Present Value (NPV) for both projects. 2.2.2 Recommend, with reasons which project should be chosen (8) (2)
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