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 R$3600000.$ This cost excludes the import duty of R$900000$ and installation costs of R$300000.$

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

investment is acceptable or not.

$(5$ Marks$)$

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

method.

$(8$ Marks$)$

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