QUESTION $5$

$(20$ Marks$)$

Note: Where discount factors are required, use only the present value tables $($Appendix $1$ and $2)$ that appear after QUESTION $5.$

$5\mathrm{.}1$

REQUIRED

From the information provided below which project would you recommend? Substantiate your answer by showing the relevant calculations that take the time value of money into account. Note: The IRR is not required.

$(8$ marks$)$

INFORMATION

MK Enterprises has R$200000$ which it will invest if the investment earns at least $16\%$ per annum. Three projects are being considered, each of which will cost $R200000$ to commence.

Project $x$ would earn R$220000$ at the end of the first year.

Project $Y$ would earn R$250000$ at the end of the second year.

Project $Z$ would eam R$120000$ at the end of the first year and R$125000$ at the end of the second year.

$5\mathrm{.}2$

REQUIRED

Study the information given below to determine whether the company should accept the investment opportunity or not. Motivate your answer by calculating the Accounting Rate of Return on average investment $($expressed to two decimal places$).$

$(5$ marks$)$

INFORMATION

Universal Limited is a manufacturing company and its management is appraising the production and sale of a new product. This would involve the purchase of a new machine with a cost price of R$1200000$ and an expected scrap$/$salvage value of R$200000.$

The net cash flows from the machine are estimated to be R$300000$ per year for eight years. Depreciation is expected to be R$125000$ per year. The company's cost of capital is $18\%.$

$5\mathrm{.}3$

REQUIRED

Use the information given below to answer the following questions:

$5\mathrm{.}3\mathrm{.}1$ Calculate the Internal Rate of Return $($expressed to two decimal places$).$ Your answer must include two net present value calculations $($using consecutive cost of capital rates$)$ and interpolation.

$(6$ marks$)$

$5\mathrm{.}3\mathrm{.}2$ Based on the IRR should the company consider purchasing the machine? Why?

$(1$ mark$)$

INFORMATION

Venus Limited is investigating an opportunity to purchase a machine for R$640000.$ The machine is expected generate net cash flows of R$180000$ per annum for five years. The company's cost of capital is $16\%.$