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 450 000 450 000 Net profit: Year 1 36 000 69 000 Year 2 75 000 69 000 Year 3 102 000 69 000 Year 4 129 000 69 000 Year 5 81 000 69 000 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 R60 000. 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:

3.1 Calculate the payback period for project B. (Answer must be expressed in years and months) (3)

3.2 Calculate the accounting rate of return (on average investment) for project A. (Answer must be expressed to two decimal places) (4)

3.3 Calculate the net present value of each project. (Round off amounts to the nearest Rand.) (6)

3.4 Using your answers from question 3.3, which project should be chosen? Why? (2)