All Grain Ltd has done some reserach and discovered that it can gain market share in the health and fitness sector by providing affordable gym services to the general populace. It has decided to charge customers an affordable yearly fee (instead of a monthly fee), which is standard practice at other gyms.

The proposed investment will involve establishing 3 gyms on the Johannesburg area. Investment in all 3 gyms will be R9 million. This consists of gym equipment with a total cost of R8 million and other initial cost of R1 million.

The gym equipment is depreciated on the straight-line basis over a 5 year period with a residual value of nil. At the end of the five-year period, all gym equipment is expected to collectively result in the following accounting profits:

YEAR ACCOUNTING PROFITS (R000)

Year 1 (R1 000)

Year 2 1000

Year 3 1 500

Year 4 2 000

Year 5 4 000

Negative amounts are indicated in brackets.

• Calculate the payback period (expressed in years, months, days) associated with the proposed investment

YEAR

Year 1

Year 2

Year 3

Year 4

Year 5

ASSUMING the company's cost of capital is 15%, and using the NVP analysis, determine whether All Grain Ltd should make the proposed investment?