QUESTION FOUR [25]

Yoda Construction is looking to invest in new construction equipment. The following information has been extracted from the reports relating to the project:

Investment R90 000

Average Annual Profit R26 667

Life span 3 years

Minimum required rate of return 10%

Cash flows:

1st year R20 000

2nd year R400 000

3rd year R110 000

Required:

4.1 Calculate the accounting rate of return on average investment (express the answer to two decimal places). (6)

4.2 Calculate the payback period (answer in years, months and days). (5)

4.3 Calculate the net present value (round off amounts to the nearest Rand). (7)

4.4 Would the project be acceptable at a cost of capital of 12%? Motivate your answer with an appropriate calculation that takes into consideration the time value of money. (7)