Question

Gandul Limited has the option to invest in Project XXX. The following information is available on the project: Project XXX

Project XXX

Investment R280 000

Scrap value Nil

Expected life 5 years

Cost of capital 12%

Expected after tax profits and cash flows Profits Cash flows

End of: Rand

Rand

Year 1 23 000 79 000

Year 2 26 000 82 000

Year 3 40 000 96 000

Year 3 43 000 99 000

Year 5 14 000 70 000

Required:

2.1 Calculate the accounting rate of return. (Two decimal places)(4)

2.2 Calculate the payback period. (In years, months and days)(4)

2.3 If the payback cut off is three years, should the project be chosen? Why?(2)

2.4 Calculate the net present value of the project. (Round off amounts to the nearest Rand.)(8)

2.5 Should the project be accepted on the basis of NPV? Why?(2)