QUESTION 5

INVESTMENT CRITERIA

(20 MARKS)

Note: Where applicable, refer to the present value tables (APPENDIX 1 and 2).

REQUIRED

Use the information provided below to calculate the following:

5.1 Payback Period for Project B. (Answer must be expressed in years and months) (2)

5.2 Accounting Rate of Return (on average investment) for both projects.(6)

5.3 Net Present Value for Project A.(3)

5.4 Benefit Cost Ratio for Project B.(4)

5.5 Internal Rate of Return for Project B. (5)

INFORMATION

Your company has the option to invest in machinery in projects A or B but finance is only available to invest in one of them. You are given the following projected data:

Project A Project B Project A Project B

R R R R

Net cash inflow Net cash inflow Net profit Net profit

Year 1 65 000 80 000 5 000 20 000

Year 2 85 000 80 000 25 000 20 000

Year 3 93 000 80 000 33 000 20 000

Year 4 89 000 80 000 29 000 20 000

Year 5 89 000 80 000 29 000 20 000

Additional information

The initial cost of machinery for each project is R300 000.

The discount rate to be used by the company is 12%.