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K-Way Limited (Ltd), a softdrink manufacturer has the option to invest in machinery for projects A and B. However due to constraint financial resources the
K-Way Limited (Ltd), a softdrink manufacturer has the option to invest in machinery for projects A and B. However due to constraint financial resources the company may only be able to invest in one of them. You are given the following projected data: Information: Project A has an initial cost of R1 BO 000 and the expected net prot over the five-year investment is R24 000, R31 000, R36 000, R40 000 and R19 000 per annum, respectively. Whereas. Project B has an initial cost of R190 000 with projected annual net prot of R24 000 every year for the 5-year expected lifespan. Additional information: . Project A machinery will be disposed of at the end of year 5 with a scrap value of R20 000. . Project B machinery will be disposed of at the end of year 5 with a nil scrap value. . Depreciation is calculated on a straight-line basis. . The discount rate to be used by the company is 12%. Requhed: 1.1 Calculate the accounting rate of return for project A and B. (5 marks) 1.2 Determine the payback period for each project. {5 marks) 1.3 Calculate the net present value of each project. {1' marks) 1.4 Using your answers from question 1.3 above. choose with reasons the most suitable project? (3 marks) 1.5 Calculate the internal rate of return for project B. {5 marks)
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