Answer ALL questions

QUESTION 1 (25 Marks)

1.1 Your parents set up a trust fund for you 22 years ago that is now worth R47 866,34. If the fund earned 8% per year, how much did your parents invest? (5)

1.2 Suppose you are offered an investment that will allow you to double your money in 9 years. You have R20 000 to invest. What is the implied rate of interest? (7)

1.3 Suppose you have a 4-year-old son and you want to provide R55 000 in 16 years towards his college education. You currently have R5 000 to invest. What interest rate must you earn to have the R55 000 when you need it? (7)

1.4 Suppose you want to buy a new house. You currently have R30 000 and you figure you need to have a 10% down payment plus an additional 5% of the loan amount in closing costs. If the type of house you want costs about R450 000 and you can earn 7.5% per year, how long will it be before you have enough money for the down payment and closing costs? (6)

QUESTION 2 (25 Marks)

Pearl Limited is considering upgrading its plant to expand it client base. The financial details of the investment proposal are as follows:

Cost of plant : R4 700 000

Import duty : R 900 000

Installation cost : R 450 000

Net cash flows Year 1-8 : R1 700 000 per annum (excluding residual value)

Residual/scrap value : R1 300 000

The company uses straight-line depreciation. The cost of capital for projects of similar risk is 18%. Ignore taxation.

Required: 2.1 Calculate the investments Accounting Rate of Return (ARR). (5)

2.2 Briefly explain if the ARR is acceptable or not based on a target rate of return of 25%. (2)

2.3 Assume a payback period of 3 years. Determine the payback period and state if the investment is acceptable or not. (5)

2.4 Calculate and comment on the viability of the proposed investment based on the net present value (NPV) method. (8)

2.5 Discuss whether the advantages of using the NPV method outweigh the disadvantages. (5)