The following data relate to two investment projects, only one of which may be selected:

Project W PROJECT L

R R

Initial capital expenditure 200 000 200 000

Net cash inflows per year:

Year 1 100 000 67 000

Year 2 70 000 67 000

Year 3 60 000 67 000

Year 4 36 000 67 000

Expected resale value at end of year 4 20 000 0

Average annual profit 21 500 17 000

NOTE The cost of capital is 15%.

Required:

1.1.1 Calculate the Payback Period for Project L (answer expressed in years, months and days.)

1.1.2 Calculate the Accounting Rate of Return (on average investment) for both project

1.2 A q u a Limited is considering the purchase of a machine with the following details:

The machine will cost R1 000 000 plus installation costs of R200 000 and it is expected to have a useful life of five years.

The machine is expected to generate net cash inflows of R300 000 per year.

Note: The company desires a minimum required rate of return of 12%.

1.2.1 Calculate the Net Present Value, if the machine is expected to have a salvage value of R50 000.

1.2.2 Calculate the Internal Rate of Return if the machine had no salvage value.