Question

Study the information bellow and answer the following questions

Required

1.Calculate the payback period of nick and nak equipment (answer must be expressed in years,months and days)

2.Calculate the accounting Rate of return ( on average investment )of Nak equipment (answers expressed to two decimal places)

3.Calculate the net Present value of Nik equipment.(round off amounts to the nearest rand)

4.Calculate the Internal rate of return of Nak equipment (answer expressed to two decimal places)

Information

Simba limited is investigation the possibility of investing in new equipment , nick or nack.the net cash flows and profit (loses ) for two competing equipment are as follows

	nick		Nak
year	Net Cash flows	profit (loses)	Net Cash flows	profit (loses)
1	440000	240000	288000	88000
2	420000	220000	288000	88000
3	300000	100000	288000	88000
4	180000	-20000	288000	88000
5	100000	-100000	288000	88000
The equipment costs R1000000 for each projets and no scrap value is expected.the requiered rate of return is 12%

Answer 1

1	Payback period for uneven cash flows=Year after which cumulative cashflow become positive+(cumulative cashflow of the year after which cumulative cashflow become positive/cashflow for next year)
	Nick
	Year	Net cash flow	Cumulative cash flow
	0	-1000000	-1000000
	1	440000	-560000
	2	420000	-140000
	3	300000	160000
	4	180000	340000
	5	100000	440000
	Payback period=2+(140000/300000)=2+0.466667=2.466667 years=2 years, 5 months and 18 days
	(First Multiply 0.466667 with 12,it will give 5.600004.Hene take as 5 months
	Then multiply 0.600004 with 30 days.It will give 18.Hence take as 18 days)
	Nack:
	Payback period for even cash flows=Initial investment/Net cash flow per year=1000000/288000=3.472222=3 years,5 months and 20 days
	(First Multiply 0.472222 with 12,it will give 5.666664.Hene take as 5 months
	Then multiply 0.666664 with 30 days.It will give 20.Hence take as 20 days)
2	Accounting rate of return=Average operating income/Average Investment
	Average operating income=Total profit (losses)/number of years
	Average Investment=(Beginning value of investment+Ending value of investment)/2
						Nack
	Total profit (losses)				a	440000
	Number of years				b	5
	Average operating income				c=a/b	88000
	Beginning value of investment				d	1000000
	Ending value of investment				e	0
	Average Investment				f=(d+e)/2	500000
	Average rate of return				g=c/f	17.6%
3	Net present value-Nik:
	Year	Cash flow	Discount factor at 12%	Present value
	0	-1000000	1	-1000000
	1	440000	0.89286	392857.1
	2	420000	0.79719	334821.4
	3	300000	0.71178	213534.1
	4	180000	0.63552	114393.3
	5	100000	0.56743	56742.69
	Net present value			112348.6
4	IRR=Rate at which present value of cash inflows=Initial cash outflow
	Initial cash outflow/cash inflows=1000000/288000=3.472222
	Now look into the cumulative present value table for the row where period=5
	Search for 3.472222 in that row
	Hence, IRR is between 13% and 14%
	IRR=13.5% (Approx.)