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QUESTION 1 [25 Marks] K-Way Limited (Ltd), a softdrink manufacturer has the option to invest in machinery for projects A and B. However due to
QUESTION 1 [25 Marks] 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 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. (7 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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