QUESTION ONE [25]

Kananda Ltd is considering investing in a project with the following forecasted details: Initial amount invested is R400 000 and expected residual value is R30 000.

Year Cashflows Discount factor

Year 1 R80 000 0.909

Year 2 R150 000 0.826

Year 3 R140 000 0.751

Year 4 R80 000 0.683

Year 5 R70 000 0.621

Assuming that the cost of capital for the company is 10%. The cash flows are after tax and depreciation is charged at R30000 per year. Tax rate is 28%.

Required:

1.1 Calculate each of the following:

1.1.1 Accounting Rate of Return (5)

1.1.2 Payback period. (5)

1.1.3 Net Present Value (10)

1.2 Evaluate whether the project should be accepted. (5)