Leta Limited is considering the purchase of a machine. The machine will cost R2 000 000 and is expected to have a useful life of 5 years, with no salvage value. The machine is expected to increase revenues by R840 000 per year but operating costs will increase by R300 000 per year. The average annual profit is estimated at R140 000. The company desires a minimum required rate of return of 12%.

Required:

1.1 Study the information given above and calculate the following in respect of the machine:

1.1.1 Payback Period (answer expressed in years, months and days. (5)

1.1.2 Accounting Rate of Return on average investment (answer expressed to two

decimal places. (5)

1.1.3 Net Present Value, if the machine has a salvage value of R200 000. (Round off amounts to the nearest Rand.) (11)

1.2 Evaluate the incremental and zero-based approaches to budgeting. (4)