Question
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 R180 000 and the expected net profit 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 profit 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%. Required:
1.1 Calculate the accounting rate of return for project B. (5 marks)
1.2 Determine the payback period for project B (5 marks)
1.3 Calculate the net present value of project B. (5 marks)
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