QUESTION TWO [25]

2.1 Astra Ltd intend investing in a new machine. The following details relating to the machine apply:

Cost of machine R360 000

Expected useful life 5 years

Scrap value R 60 000

Method of depreciation Straight-line

Cost of capital 12%

Year Profit R

1 6 000

2 18 000

3 100 000

4 66 000

5 112 000

Required: 2.1.1 Calculate the pay-back period (8)

2.1.2 Calculate the accounting rate of return (ARR). (5)

2.1.3 Comment on the above returns taking into account that Astra Ltd requires a payback period of 3 years and a return of at least 40%. (2)

2.2 The following information relates to two projects, Project Alpha and Project Omega from which one must be chosen by Delta Construction Ltd. After-tax cash flows:

Year Project Alpha R Project Omega R

1 0 72 000

2 37 000 72 000

3 72 400 72 000

4 246 000 72 000

Both projects require an initial investment of R235 400 and the cost of capital is 12%. As the project manager of Delta Construction Ltd. you are required to:

2.2.1 Calculate the Net Present Value (NPV) for both projects. (8)

2.2.2 Recommend, with reasons which project should be chosen (2)