QUESTION $5$

$(20$ MARKS$)$

Note: Where discount factors are required, use only the present value tables $($Appendix $1$ and $2)$ that

appear after the formula sheet.

REQUIRED

Study the information given below and answer the following questions:

$5\mathrm{.}1$ Determine the Net Present Values of the two investment alternatives. $($Show the

calculations of the present values as well as the net present values.$)$

$5\mathrm{.}2$ If both the net present values were negative, what advice would you offer Mustek Limited?

$5\mathrm{.}3$ Calculate the Accounting Rate of Return on average investment of Option $2($expressed

to two decimal places$).$

$5\mathrm{.}4$ Calculate the Internal Rate of Return $($expressed to two decimal places$)$ of Option $1.$ Your

answer must include two net present value calculations $($using consecutive

rates$/$percentages$)$ and interpolation.

INFORMATION

Mustek Limited is planning a new business venture. With R$3000000$ available funds to invest, it is

investigating two options:

Option $1$ is to acquire an exclusive contract to operate vending machines in municipal offices in a city for four

years. The contract requires the firm to pay the city R$2000000$ cash at the beginning. A once off payment

of R$300000$ is also required at the beginning for transportation and installation. The firm expects cash

revenues from the operation to be R$1800000$ per year and cash expenses to be R$1000000$ per year.

Option $2$ is to operate a printing shop in a busy shopping mall. This option would require the company to

spend R$2700000$ for printing equipment that has an estimated useful life of four years, with a R$400000$

salvage value. The cash revenues are expected to be R$2600000$ per year and cash expenses are expected

to be R$1700000$ per year.

Mustek Limited uses the straight$-$line method of depreciation. The company's cost of capital is $12\%.$