QUESTION THREE [25]

Telin Ltd purchased a new tractor at a cost of R 80 000. Annual operating cash inflows are expected to be R 30 000 each year for four years. At the end of the tractors useful life, the salvage value of the tractor is expected to be R 5 000.

Required: 3.1. The company requires a payback period of not more than 5 years. Indicate, based on this criterion, whether the project should be accepted. (8)

3.2. Calculate the Net Present Value if the Cost of Capital is 12% (ignore taxes). Indicate with reasons whether based on this calculation that this project should be accepted or not. (12)

3.3. Outline the advantages and disadvantages of the Payback Period method. (5)