QUESTION ONE [20]

Hondai (Ltd) that operate in the automobile industry is considering replacing a machine with a new one that requires a R4 200 000 investment. The operating cash inflows over the next 9 years will be R740 000 per annum and the cash inflow for the 10th year will be R220 000. Thereafter the machine will be sold for R400 000. The company uses straight-line depreciation. The cost of capital for projects of similar risk is 11%. Note : Average profit is R308 000. Ignore taxation. Required:

1.1 Assume a payback period of 6 years. Determine the payback period and state if the investment is acceptable or not. (5)

1.2 Determine the investment's Accounting Rate of Return (ARR). (3)

1.3 Briefly explain if the ARR is acceptable or not based on a target rate of return of 20% (3)

1.4 Calculate the net present value (NPV) and briefly comment on the viability of the proposed investment. Justify why the NPV method is the preferred choice for investment appraisals