QUESTION ONE: (25 MARKS)

Gogo Limited has just made an investment of R390 000 in a new machine. Details of the machine are as follows:

Expected useful life 5 years (straight line depreciation)

Salvage value 10 000 (sold as scrap metal)

Cost of capital 10 %

The tax rate is 30%

Expected cash flows are as follows:

Year:

1 - 80 000

2 - 120 000

3 - 100 000

4 - 110 000

5 - 90 000

Required:

1.1 Calculate the Payback Period. (5)

1.2 Determine the Accounting / Average Rate of Return (ARR). (5)

1.3 Gogo Limited requires a payback period of no more than 4 years and a return of at least 25%. On the basis of these criteria, should this project be accepted? Explain your answer. (4)

1.4 Calculate the Net Present Value for the project. Should the project be accepted on this basis? Explain your answer. (7)

1.5 To make your ultimate decision, which method will you choose? Why? (4)