FINANCIAL QUESTION TWO [25]

2.1. Evaluate the Internal Rate of Return as an investment appraisal technique.

2.2 RP Investments Ltd have just made an investment of R550 000 in new equipment.

Additional information:

Expected useful life 5 years (straight line depreciation)

Salvage value 50 000

Cost of Capital 10% after tax

Tax rate 30% Years

Years Cash flows

1 220 000

2 200 000

3 120 000

4 110 000

5 50000

Required:

2.2.1 Calculate the payback period (4) and the accounting rate of return (4). (8)

2.2.2 RP Investments Ltd requires a payback period of no more than 3 years and an accounting rate of return of at least 30%. On the basis of these criteria, should this project be accepted? Justify your answer. (5)

2.2.3 The payback period method makes a crucial omission in its calculation, namely the time value of money. Complete the above computation using a method that accounts for the time value of money. On the basis of this calculation, should the project be accepted? Justify your answer. (9)