WestPack Investment Ltd has a choice of two projects to invest in. The following details relate to these projects:

Handy Andy Jik

Investment required R 85 000 R 80 000

Expected economic lifetime 6 years 6 years

Minimum required rate of return 12 % 12 %

Net annual cash inflows

1st year R 20 000 R 22 000

2nd year R 22 000 R 22 000

3rd year R 24 000 R 22 000

4th year R 26 000 R 22 000

5th year R 23 000 R 22 000

6th year R 21 000 R 22 000

Required:

2.1 Use the Net Present Value (NPV) method to determine which project WestPack Investment Ltd should choose. (14)

2.2 Outline the merits of using the NPV method. (4)

2.3 Calculate the Payback Period for both projects and discuss an advantage of using this method. (5)

2.4 State a disadvantage of using the Accounting Rate of Return Method. (2)