QUESTION $4$

$(25$ Marks$)$

Sherwood Limited is considering upgrading its plant to expand it client base. The financial details of the investment proposal are as follows:

The cost of the plant is $R3600000.$ This cost excludes the import duty of $R900000$ and installation costs of $R300000.$ The net cash flows for the $10-$year period are R$1400000$ per annum $($excluding residual value$).$ The residual value is R$1200000.$

The company uses straight$-$line depreciation. The cost of capital for projects of similar risk is $18\%.$ Ignore taxation.

Required:

$4\mathrm{.}1$ Calculate the investment's Accounting Rate of Return $($ARR$).$

$(4$ Marks$)$

$4\mathrm{.}2$ Briefly explain if the ARR is acceptable or not based on a target rate of return of $30\%.$

$(3$ Marks$)$

$4\mathrm{.}3$ Assume an acceptable payback period of $3$ years. Determine the payback period and state if the

$(5$ Marks$)$

investment is acceptable or not.

$4\mathrm{.}4$ Calculate and comment on the viability of the proposed investment based on the net present value $($NPV$)$

$(8$ Marks$)$

method.

$4\mathrm{.}5$ Discuss whether the advantages of using the NPV method outweigh the disadvantages.

$(5$ Marks$)$