QUESTION TWO [30]

The following 2 mutually exclusive projects (Project A and Project B) are available to Simonsbosch Farm. They are producers of Rooi Bos tea. The initial cash outlay and cash flows are shown below and Simonsbosch will use straight line depreciation over each of the assets 4 year life and there will be no residual value on either investment.

Years	Cash Flows (A)	Cash Flows (B)
0 (Investment)	-240 000	-90 000
1	28 000	40 000
2	38 000	40 000
3	100 000	30 000
4	200 000	7 000

Additional information:

a. The company requires a minimum accounting rate of return of 25% on all its investments.

b. It rigidly applies a payback period of no more than 3.5 years.

c. Their after tax cost of capital is 12%. d. Applicable tax rate is 30%.

Required:

2.1. Which project is more lucrative if the payback rule is applied? (5)

2.2. Apply the Accounting Rate of Return (ARR) test. Which project is more viable? (8)

2.3. Determine which project is more lucrative if the NPV rule is applied. (13)

2.4. Which of the above projects will you recommend to Simonsbosch. Explain in details your choice of answer (by critically assessing each of the above calculations that you have made.)