The management of Aaltic Incorporated is considering two investment opportunities:

The first alternative involves the purchase of new machinery for R500 000 which will enable the company to modernise its plant. The machinery is expected to have a useful life of 5 years and no salvage value is anticipated. The modernisation is expected to increase efficiency, resulting in an increase of R142 000 in annual net cash flows.

The second alternative involves purchasing a truck. The truck costs R500 000. Its useful life is expected to be 5 years and a salvage value of R100 000 is anticipated. The truck is expected to generate R320 000 per year in additional revenues. The drivers salary and other cash operating expenses are expected to amount to R180 000 per year.

Note:

Aaltic Incorporated desires a rate of return of 12%. The straight-line method of depreciation is used.

Calculate the:

Payback Period for the first alternative. (5)

Accounting Rate of Return for the first alternative. (4)

Net Present Value for both alternatives. (16)