PROJECT A

PROJECT B

5.1

PAYBACK PERIOD: PROJECT A
Investment
Year 1 Cash flow
Workings:
Payback period is:

5.2

5.3

ACCOUNTING RATE OF RETURN	=		X
PROJECT A				1
	=		X
				1
	=

5.4

NPV: PROJECT A
Year	Net Cash flow	Discount Factor	Present value
1
2
3
4
5
Total PV
Investment
NPV

NPV: PROJECT B

5.5

IRR: PROJECT B
Year	Net cash flow	Discount Factor %	Discount Factor %	Present value %	Present value %
1-5
Investment
NPV

(Or you may use your own format.)

IRR =		+
=		+
=

REQUIRED Study the information provided below and answer the following questions. Where applicable, use the present value tables provided in APPENDICES 1 and 2 that appear after QUESTION 5. 5.1 Calculate the Payback period of Project A (expressed in years, months and days.) (3 marks) 5.2 The payback period of Project 3 is 3 years, 9 months and 28 days. On the basis of payback period, which project should be chosen? Why? (1 mark) 5.3 Calculate the Accounting Rate of Retum (on average investment) of Project A (expressed to two decimal places). (5 marks) 5.4 Calculate the Net Present Value of each project 16 marks) 5.5 Calculate the Intemal Rate of Retum of Project B (expressed to two decimal places) if the net cash flows are R125 000 per year for five years. (5 marks) INFORMATION The following information relates to two capital investment projects that are being considered by Senzo Ltd. Due to the availability of funds, only one of the projects may be chosen. Project A R400 000 Project B R400 000 Initial cost 5 years 5 years Expected useful life Scrap value Nil Ni R80 000 R80 000 Depreciation per year Cost of capital 15% 15% Expected net profit Year 1 R20 000 Year 2 R40 000 R50 000 R50 000 R50 000 Year 3 R80 000 Year 4 R50 000 R60 000 R30 000 Year 5 R50 000