QUESTION ONE

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

180 000

2 120 000

3 100 000

4 110 000

5 90 000

Required: ( Please show all calculations )

1.1 Calculate the Payback Period(5 marks)

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

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 marks )

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

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