Question
QUESTION TWO (20 Marks) REQUIRED Study the information provided below and answer the following questions: 2.1 Calculate the Payback Period of both projects (answers expressed
QUESTION TWO (20 Marks)
| REQUIRED | ||
| Study the information provided below and answer the following questions: | ||
| 2.1 | Calculate the Payback Period of both projects (answers expressed in years, months and days.) Which project would you choose on the basis of payback period? Why? |
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| (6 marks) | |
| 2.2 | Calculate the Accounting Rate of Return for both projects (answer expressed to two decimal places). |
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| (6 marks) | |
| 2.3 | Calculate the Net Present Value for both projects. (Round off amounts to the nearest Rand.) | (6 marks) |
| 2.4 | Based on your calculations from 2.1 2.3, which project should Rothmans Limited choose? Why? . | (2 marks) |
INFORMATION
The following information relates to two projects under consideration by Rothmans Limited:
|
| Project A | Project B | |
| Initial cost | R1 555 000 | R1 550 000 | |
| Expected life | 7 years | 7 years | |
| Expected scrap value | 0 | 0 | |
| Expected net cash flows: | R | R | |
| End of year | 1 | 450 000 | 420 000 |
| 2 | 420 000 | 420 000 | |
| 3 | 400 000 | 420 000 | |
| 4 | 200 000 | 420 000 | |
| 5 | 180 000 | 420 000 | |
| 6 | 350 000 | 420 000 | |
| 7 | 450 000 | 420 000 | |
The company estimates that its cost of capital is 13%.
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Advanced Accounting
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
10th edition
0-07-794127-6, 978-0-07-79412, 978-0077431808
