Question

As a financial manager of Limited Enterprises, you are required to analyse two proposed capital investments,
Projects 1 and 2. Each has a cost of R100 000, and the cost of capital for each project is 12%. Depreciation on
each project is estimated at R25 000 per year. The projects’ expected profit are as follows:

Year                      Project 1                                    Project 2
1                           R40 000                                    R10 000
2                           R5 000                                      R10 000
3                           R5 000                                      R10 000
4                          (R15 000)                                   R10 000

Required
1.1 Calculate the payback period for each project (In years, months and days).                            
1.2 Calculate the NPV for each project                                                                                            
1.3 Which project or projects should be accepted if they are independent?                                    
1.4 Calculate the ARR for project 1.                                                                                                 

Answer 1

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