QUESTION THREE $[15]$

Island Enterprises has the option to invest in machinery in projects A and B but finance is

only available to invest in one of them. You are given the following projected data:

Project A $($R$)$ Project B $($R$)$

Initial cost $450000450000$

Net profit:

Year $13600069000$

Year $27500069000$

Year $310200069000$

Year $412900069000$

Year $58100069000$

Additional information

$1.$ All cash flows take place at the end of the year except the original investment in the

project which takes place at the beginning of the project.

$2.$ Project A machinery will be disposed of at the end of year $5$ with a scrap value of

R$60000.$

$3.$ Project B machinery will be disposed of at the end of the year with a nil scrap value.

$4.$ Depreciation is calculated on a straight$-$line basis.

$5.$ The discount rate to be used by the company is $12\%$

Required

Use the information provided by Island Enterprises to answer the following questions:

$3\mathrm{.}1$ Calculate the payback period for project B$.($Answer must be expressed in years and

months$)(3)$

$3\mathrm{.}2$ Calculate the accounting rate of return $($on average investment$)$ for project A$.$

$($Answer must be expressed to two decimal places$)(4)$

$3\mathrm{.}3$ Calculate the net present value of each project. $($Round off amounts to the nearest

Rand.$)(6)$

$3\mathrm{.}4$ Using your answers from question $3\mathrm{.}3,$ which project should be chosen? Why? $(2)$