CASE STUDY [30 Marks] Read the case study and answer the questions that follow: MEGAZONE LIMITED Megazone Limited is well known for its focus on innovation and this is highlighted in the companys website. The website also tells a story of growth and success in the marketplace. This, combined with the excellent quality products offered, has made Megazone Limited a leader in the marketplace. At the end of 2021 the plant and equipment (at carrying value) totalled R5 000 000, a long-term investment was valued at R400 000, inventories amounted to R2 050 000, R1 750 000 was owed by trade debtors, cash in the bank amounted to R350 000, the ordinary share capital balance was R3 100 000, the accumulated undistributed profits amounted to R2 500 000, an amount of R3 350 000 was owed to Vap Bank in respect of a long-term loan, R270 000 was owed to the trade creditors, R250 000 was owed to shareholders for the final dividend and R80 000 was owed to SARS for income tax. At the end of 2022 the plant and equipment (at carrying value) totalled R6 250 000, the long-term investment was valued at R350 000, inventories amounted to R2 150 000, R1 900 000 was owed by trade debtors, cash in the bank amounted to R500 000, the ordinary share capital balance was R3 100 000, the accumulated undistributed profits amounted to R3 000 000, an amount of R3 600 000 was owed to Vap Bank in respect of the long-term loan, R1 200 000 was owed to the trade creditors, R200 000 was owed to shareholders for the final dividend and R50 000 was owed to SARS for income tax. The depreciation, operating profit, interest expense and income tax for the year ended 31 December 2022 amounted to R750 000, R1 650 000, R450 000 and R400 000 respectively. Dividends paid and recommended amounted to R300 000. In keeping with the companys growth strategy, the directors have identified two possible investment opportunities for 2023 viz. Project X and Project Y. An investment of R1 000 000 is required for each project. The useful life of each project is estimated to be five years. Project X is expected to generate net cash flows of R350 000 (Year 1), R340 000 (Year 2), R330 000 (Year 3), R230 000 (Year 4) and R280 000 (Year 5). Project Y is expected to generate net cash flows of R330 000 per year over its useful life. A scrap value of R100 000 (not included in the figures above) is anticipated for Project X only. The companys cost of capital is predicted to be 15%. The straight-line method of depreciation is used by the company.

Answer ALL the questions in this section.

QUESTION 1 (15 Marks)

Prepare the financial statement for the year ended 31 December 2022 that provides details about the cash inflows and cash outflows of Megazone Limited..

QUESTION 2

Refer to the investment opportunities for 2023 and calculate the following. (Ignore taxes.) 2.1 Accounting Rate of Return on average investment of Project Y (expressed to two decimal places). (4 marks) 2.2 Net Present Value of both projects (showing all the relevant present value calculations). (6 marks) Internal Rate of Return of Project Y (expressed to two decimal places) using two net present values to form part of the calculations. 2.3 (5 marks)