QUESTION 3

Calculate the payback period of each project and recommend the project that should be selected

based on the payback period.

(6 marks)

Consider two projects whose cash inflows are not even. Assume that the project costs R205 000. The net cash inflows

for each year is as follows:

3.1

Year Project M Project N

1 R30 000,00 R75 000,00

2 R35 000,00 R95 000,00

3 R65 000,00 R60 000,00

4 R55 000,00 R26 000,00

5 R75 000,00

6 R95 000,00

Jimny Limited has a choice of investing in one of two projects.

The following details relate to these:

Project BWM Project AMG

Investment required R70 000 R70 000

Expected Economic lifetime 4 years 4 years

Minimum required return of return 12% 11%

Net annual cash inflows

1st year R15 000,00 R23 000,00

2nd year R30 000,00 R23 000,00

3rd year R28 000,00 R23 000,00

4th year R18 000,00 R23 000,00

3.2

3.2.1 Use the net present value method to determine which project Jimny Limited should choose (8 marks)

3.2.2 Calculate the internal rate of return of Project AMG. (6 marks)

3.2.3 Calculate the Accounting Rate of Return for Project AMG. (5