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QUESTION THREE [20] Cato Ltd need to invest in machinery for projects M and N. However due to constraint financial resources the company may only

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QUESTION THREE [20] Cato Ltd need to invest in machinery for projects M and N. However due to constraint financial resources the company may only be able to invest in one of them. You are given the following projected data: Project M (R) Project N (R) Initial cost 720 000 760 000 Net profit/ (Loss): Year 1 (20 000) 114 000 Year 2 82 000 114 000 Year 3 151 000 114 000 Year 4 190 000 114 000 Year 5 67 000 114 000 Additional information: 1. Project M machinery will be disposed of at the end of year 5 with a scrap value of R80 000. 2. Project N machinery will be disposed of at the end of year 5 with a nil scrap value. 3. Depreciation is calculated on a straight line basis. The discount rate to be used by the company 12%. 4. = Required: 3.1 Calculate the accounting rate of return for project M and N. (5) 3.2 Determine the payback period for each project. (note: net profit + depreciation = cash flows) (6) 3.3 Calculate the net present value of each project. (6) 3.4 Using your answers from question 3.3 above, choose with reasons the most suitable project. Why? (3) QUESTION THREE [20] Cato Ltd need to invest in machinery for projects M and N. However due to constraint financial resources the company may only be able to invest in one of them. You are given the following projected data: Project M (R) Project N (R) Initial cost 720 000 760 000 Net profit/ (Loss): Year 1 (20 000) 114 000 Year 2 82 000 114 000 Year 3 151 000 114 000 Year 4 190 000 114 000 Year 5 67 000 114 000 Additional information: 1. Project M machinery will be disposed of at the end of year 5 with a scrap value of R80 000. 2. Project N machinery will be disposed of at the end of year 5 with a nil scrap value. 3. Depreciation is calculated on a straight line basis. The discount rate to be used by the company 12%. 4. = Required: 3.1 Calculate the accounting rate of return for project M and N. (5) 3.2 Determine the payback period for each project. (note: net profit + depreciation = cash flows) (6) 3.3 Calculate the net present value of each project. (6) 3.4 Using your answers from question 3.3 above, choose with reasons the most suitable project. Why? (3)

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