Elmarie Ltd has a choice of two projects to invest in. The following details relate to these projects: Project A Project Z Investment required R 85 000 R 80 000 Expected economic lifetime 6 years 6 years Minimum required rate of return 12 % 12 % Net annual cash inflows 1st year R 20 000 R 22 000 2nd year R 22 000 R 22 000 3rd year R 24 000 R 22 000 4th year R 26 000 R 22 000 5th year R 23 000 R 22 000 6th year R 21 000 R 22 000

Required:

3.1 Use the Net Present Value (NPV) method to determine which project Elmarie 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)