***PLEASE ANSWER ALL SUB-QUESTIONS AND EXPLAIN STEP BY STEP, PLEASE INCLUDE FORMULAE IN CORRECT FORMAT NOT COMPUTED VERSIONS, PLEASE INCLUDE NOMENCLATURE FOR ALL FORMULAE USED. THANK YOU FOR THE ASSISTANCE! ** PLEASE ANSWER THE ENTIRE QUESTION UNTIL THE END****

QUESTION THREE

Island Enterprises has the option to invest in machinery in projects A and B but finance is only available to invest in one of them. You are given the following projected data:

	Project A (R)	Project B (R)
Initial cost	450 000	450 000
Net profit:
Year 1	36 000	69 000
Year 2	75 000	69 000
Year 3	102 000	69 000
Year 4	129 000	69 000
Year 5	81 000	69 000

Additional information

1. All cash flows take place at the end of the year except the original investment in the project which takes place at the beginning of the project.

2. Project A machinery will be disposed of at the end of year 5 with a scrap value of R60 000.

3. Project B machinery will be disposed o fat the end of the year with a nil scrap value.

4. Depreciation is calculated on a straight-line basis.

5. The discount rate to be used by the company is 12%.

Required

Use the information provided by Island Enterprises to answer the following questions:

1. 3.1 Calculate the payback period for project B. (Answer must be expressed in years and months)

2. 3.2 Calculate the accounting rate of return (on average investment) for project A. (Answer must be expressed to two decimal places)

3. 3.3 Calculate the net present value of each project. (Round off amounts to the nearest Rand.)

4. 3.4 Using your answers from question 3.3, which project should be chosen? Why?