REQUIRED

Study the information provided below and answer the following questions:

$5\mathrm{.}1$ Calculate the Payback Period $($expressed in years and months$).(2$ marks$)$

$5\mathrm{.}2$ Calculate the Accounting Rate of Return on initial investment $($expressed to two decimal

places$).(5$ marks$)$

$5\mathrm{.}3$ Calculate the Net Present Value. Your answer must include the calculations of the

present values and the determination of the net present value. $(5$ marks$)$

$5\mathrm{.}4$ If the net cash inflows are R$100000$ per year for four years, with the machine having no

salvage value, what would the Internal Rate of Return be $($expressed to two decimal

places$)?$ Your answer must include two net present value calculations $($using consecutive

rates$/$percentages$)$ and interpolation. $(5$ marks$)$

$5\mathrm{.}5$ Suppose Wheelman Limited funds the purchase of the new machine through the issue of

ordinary shares. Assume that the present value of an ordinary share of Wheelman

Limited is R$15,$ the next projected dividend is R$1\mathrm{.}25$ per share and the expected growth

rate in dividends is $10\%$ p$.$a$.$ Use the Gordon growth model to estimate the cost of the

ordinary shares $($expressed to two decimal places$).(3$ marks$)$

INFORMATION

Wheelman Limited, a company that specialises in wheel alignment for motor vehicles, intends purchasing a

wheel alignment machine that would save $50\%$ of the labour time which would enable the business to increase

the total revenues by performing more services within a work period. The new machine costs R$250000,$

excluding shipping and installation costs of R$50000.$ The machine has an expected life of four years, with a

salvage value of R$20000.$ It is estimated that the cash revenues would increase as follows:

Year Revenue increases

$1$ R$80000$

$2$ R$110000$

$3$ R$130000$

$4$ R$140000$

Additional cash expenses are expected to amount to R$20000$ per year. The cost of capital is $12\%.$ The

straight$-$line method of depreciation is used. Ignore taxes.