QUESTION $5(20$ Marks$)$

Note: Where applicable, use the present value tables provided in APPENDICES $1$ and $2$ that appear after the formula sheet.

REQUIRED

Use the information provided below to answer the following questions:

$5\mathrm{.}1$ Calculate the Payback Period of the first alternative $($expressed in years, months and days$).(3$ marks$)$

$5\mathrm{.}2$ Calculate the Accounting Rate of Return on initial investment of the first alternative

$($expressed to two decimal places$).(4$ marks$)$

$5\mathrm{.}3$ Based on the Net Present Value, which alternative should be chosen? Why? $($Show the calculations of the present values as well as the net present values.$)(8$ marks$)$

$5\mathrm{.}4$ Calculate the Internal Rate of Return $($expressed to two decimal places$)$ of the first alternative. Your answer must include two net present value calculations $($using consecutive rates$/$percentages$)$ and interpolation. $(5$ marks$)$

INFORMATION

The management of Torga Limited is considering two investment opportunities:

The first alternative involves the purchase of new machinery for R$1200000$ which will enable the company to modernise its production facility. The machinery is expected to have a useful life of five years and no salvage value is anticipated. On the day Torga Limited purchases the new machinery, it would also pay the supplier R$60000$ for installation costs. The modernisation is expected to increase efficiency, resulting in a reduction in annual cash operating expenses of R$380000.$

The second alternative involves purchasing a truck. The truck costs R$1200000.$ Its useful life is expected to be five years and a salvage value of R$300000$ is anticipated. Operating the truck will necessitate an increase of R$60000$ in the company$$s working capital base immediately upon buying the truck. The working capital cash outflow is expected to be recovered at the end of the truck$$s useful life. The truck is expected to generate R$730000$ per year in additional cash revenues. The driver$$s salary and other cash operating expenses are expected to be R$360000$ per year.

Torga Limited desires a rate of return of $12\%.$ The straight$-$line method of depreciation is used. Ignore taxes.