QUESTION THREE

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$)$

$\backslash$table$[[$Initial cost $450000,450000,],[$Net profit:,,$],[$Year $1,36000,69000],[$Year $2,75000,69000],[$Year $3,102000,69000],[$Year $4,129000,69000],[$Year $5,81000,69000]]$

Additional information

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.

Project A machinery will be disposed of at the end of year $5$ with a scrap value of R$60000.$

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

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

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$)$

$3\mathrm{.}2$ Calculate the accounting rate of return $($on average

investment$)$ for project A$.($Answer must be expressed to two decimal places$)$

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

Rand.$)$

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