QUESTION 5

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

REQUIRED

Use the information provided below to answer the following questions:

5.1 Calculate the Payback Period of Machine A (expressed in years, months and days.) (3 marks)

5.2 Calculate the Accounting Rate of Return on average investment of Machine A (expressed to two decimal places). (4 marks)

5.3 Calculate the Net Present Value (NPV) of both machines. (6 marks)

5.4 Based on the Net Present Value, which machine should Aspen Limited purchase? Why? (1 mark)

5.5 Calculate the Internal Rate of Return (IRR) of Machine B (expressed to two decimal places). Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation. (6 marks)

INFORMATION

Aspen Limited intends purchasing a new machine and has the option of purchasing Machine A or Machine B.

The following details apply. Ignore taxes.

	Machine A	Machine B
Purchase price	R500 000	R500 000
Expected useful life	4 years	4 years
Scrap value	0	0
Depreciation per year	R125 000	R125 000
Minimum required rate of return	12%	12%
Expected net cash inflows
Year 1	?	R180 000
Year 2	?	R180 000
Year 3	?	R180 000
Year 4	?	R180 000
Expected net profit
Year 1	R15 000	?
Year 2	R35 000	?
Year 3	R95 000	?
Year 4	R75 000	?