Debbie Ltd has a choice of two projects to invest in. The following details relate to these projects:

Project A Project Z

Required:

3.1 Use the Net Present Value (NPV) method to determine which project debbie Ltd should

choose. (14)

3.2 Outline the merits of using the NPV method. (4)

3.3 Calculate the Payback Period for both projects and discuss an advantage of using this

method. (5)

3.4 State a disadvantage of using the Accounting Rate of Return Method. (2)

Project A Project Z R 85 000 6 years 12% R 80 000 6 years 12 % R 20 000 Investment required Expected economic lifetime Minimum required rate of return Net annual cash inflows 1st year 2nd year 3rd year 4th year 5th year 6th year R 22 000 R 24 000 R22 000 R 22 000 R 22 000 R 22 000 R 26 000 R23 000 R 21 000 R 22 000 R 22 000