QUESTION 2 (20)

INFORMATION: Vista Limited intends purchasing a new machine and has a choice between the following two machines: Equipment A Equipment B Initial cost R220 000 R240 000 Expected useful life 5 years 5 years Scrap value Nil Nil Expected net cash inflows: R R End of: Year 1 55 000 70 000 Year 2 60 000 70 000 Year 3 62 000 70 000 Year 4 60 000 70 000 Year 5 70 000 70 000 The company estimates that its cost of capital is 12%.

Required: 2.1 Calculate the Payback Period of both equipment. (Answers must be expressed in years, months and days). (4)

2.2 Calculate the Accounting Rate of Return (on initial investment) for both equipment A and B. (Answers must be expressed to 2 decimal places). (5)

2.3 Calculate the Net Present Value of each equipment. (Round off amounts to the nearest Rand.) (6)

2.4 Calculate the Internal Rate of Return of Equipment B. (5)