The following information relates to a capital investment project that is being considered by Harrods Ltd:

Initial cost R400 000

Expected useful life 5 years

Expected net cash flows and profit:

Net cash flows Net profit End of:

Year 1 R160 000 R80 000

Year 2 R140 000 R60 000

Year 3 R130 000 R50 000

Year 4 R100 000 R20 000

Year 5 R100 000 R20 000

The company estimates that its cost of capital is 12%. No scrap value is expected.

REQUIRED: Use the information provided to answer the following:

2.1 If a payback period of less than three years is desired, would the project be acceptable? Motivate your answer by doing the relevant calculations (answer expressed in years, months and days)

2.2 Calculate the Accounting Rate of Return on average investment (expressed to two decimal places).

2.3 Calculate the Net Present Value

2.4 Calculate the Internal Rate of Return (IRR) of the project, if the net cash flows are R120 000 per year for each of the five years instead of the values stated above. Your answer must include the calculation of the two net present values as well as the determination of the IRR expressed to two decimal places

2.5 Would you recommend the payback period as a technique in capital budgeting and Investment appraisal? Motivate your answer.