RP Investments Ltd have just made an investment of R550 000 in new equipment. Additional information: Expected useful life 5 years (straight line depreciation) Salvage value 50 000 Cost of Capital 10% after tax Tax rate 30% Years Cash flows 1 220 000 2 200 000 3 120 000 4 110 000 5 50 000 Required:

2.2.1 Calculate the payback period (4) and the accounting rate of return (4). (8)

2.2.2 RP Investments Ltd requires a payback period of no more than 3 years and an accounting rate of return of at least 30%. On the basis of these criteria, should this project be accepted? Justify your answer. (5)

2.2.3 The payback period method makes a crucial omission in its calculation, namely the time value of money. Complete the above computation using a method that accounts for the time value of money. On the basis of this calculation, should the project be accepted? Justify your answer. (9)