Question
QUESTION FOUR Mia Traders is considering upgrading its machinery with the intention of increasing manufacturing output to expand its client base. The financial details of
QUESTION FOUR Mia Traders is considering upgrading its machinery with the intention of increasing manufacturing output to expand its client base. The financial details of the investment proposal are as follows:
The machine will cost R4.2 million. The cost does not include R850 000 and R450 000 for import duty and installation costs respectively. The net cash flows over the 8-year period of the investment is expected to be R1.5 million per annum. The machine has a residual value of R1.1 million. The company uses straight-line depreciation. The cost of capital for projects of similar risk is 17%. Ignore taxation. The company uses straight-line depreciation. The cost of capital for projects of similar risk is 18%. Ignore taxation
4.1 Calculate the investments Accounting Rate of Return (ARR). (4 marks) 4.2 Briefly explain if the ARR is acceptable or not based on a target rate of return of 30%. (3 marks) 4.3 Assume a payback period of 5 years. Determine the payback period and state if the investment is acceptable or not. (5 marks)
4.4 Calculate and comment on the viability of the proposed investment based on the net present value (NPV) method. (8 marks) 4.5 Discuss whether the advantages of using the NPV method outweighs the disadvantages. (5 marks)
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