QUESTION 1 [25]

Stanton Salvages have just made an investment of R350 000 in a new VW Amarok delivery vehicle.

Additional information:

Expected useful life 5 years (straight line method) Salvage value 50 000 Cost of capital 10% Tax rate 30% Expected cash flow after tax is as follows:

Year Cash flows

1 150 000

2 75 000

3 35 000

4 100 000

5 (100 000)

Required:

1.1 Calculate the payback period and the accounting rate of return. (10)

1.2 Stanton requires a payback period of no more than 3 years and a return of at least 30%. Based on the above criteria, should this project be accepted? (2)

1.3 Use the NPV method to determine project viability. On the basis of this calculation, should the project be accepted? Provide a reason for your answer. (8)

1.4 Provide the advantages of using the NPV method of appraising a project. (5)