Question 5

Answer the questions from the information provided.

5.1 Calculate the following. Where applicable, use the present value tables provided in APPENDICES 1 and 2 that appear after QUESTION 5.

5.1.1 Payback Period (expressed in years, months and days.) (3 marks)

5.1.2 Accounting Rate of Return on average investment (expressed to two decimal places) (5 marks)

5.1.3 Net Present Value (4 marks)

5.1.4 Internal Rate of Return (expressed to two decimal places) using interpolation, if the net cash flows were R300 000 per year for five years (6 marks)

5.2 After considering your calculations above that take the time value of money into account, should the machine be considered for purchase? Motivate your answer.

INFORMATION

Liberty Limited intends purchasing a new machine and the following details relate to this machine:

Purchase price	R1 000 000
Expected useful life	5 years
Scrap value	0
Depreciation per year	R200 000
Minimum required rate of return	12%
Expected net profit:	R
Year 1	150 000
Year 2	160 000
Year 3	100 000
Year 4	50 000
Year 5	40 000