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Question 2 (20 Marks) Etion Limited is planning to acquire new plant and machinery for its manufacturing plant. The company is considering the following two
Question 2 (20 Marks) Etion Limited is planning to acquire new plant and machinery for its manufacturing plant. The company is considering the following two alternatives: Option 1 Plant and machinery can be purchased at a cost of R1200000. This plant and machinery will have a useful life of five years after which it can be disposed of for R120000. The plant will be written down to its book value over its useful life. The plant and machinery will generate the following net cash inflows over the five years: Option 2 Plant and machinery can be purchased for R1400000. This plant and machinery will have a useful life of five years and will generate net cash inflows of R350 000 per annum over the five years. The company depreciates assets on a straight-line basis over its useful life. The company has a required rate of return of 12%. REQUIRED 2.1 Calculate the payback period for both options. (Answers must reflect years, months and days) 2.2 Calculate the net present value for both options. (Where necessary, round off amounts to the nearest rand) (Discount factors for Present values to be used to 4 decimal places) 2.3 Calculate the accounting rate of return on average investment for option 1. (Answer to be (4 Marks) rounded to two decimal places) 2.4 Calculate the profitability index for both options. (Answers to be rounded to 2 decimal (6 Marks) places) (4 Marks) 2.5 Based on the net present values calculated, which option should be chosen if these (4 Marks) were independent options? (2 Marks)
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