QUESTION 2 (20)

As a financial manager of Xerox Enterprises, you are required to analyse two proposed capital investments, Projects A and B. Each has a cost of R100 000, and the cost of capital for each project is 12%. Depreciation on each project is estimated at R25 000 per year. The projects' expected profit are as follows:

Project A Project B

Year

1 40 000 10 000

2 5 000 10 000

3 5 000 10 000

4 (15 000) 10 000

Required

2.1 Calculate the payback period for each project (In years, months and days). (8)

2.2 Calculate the NPV for each project. (8)

2.3 Indicate with a reason which project should be chosen by Xerox Enterprises. (1)

2.4 Calculate the ARR for project A. (3)