Question

REQUIRED Use the information provided below to calculate the following: 5.1.1 Payback Period of Project A (answer expressed in years and months) 5.1.2 Net Present Value (NPV) of both projects (amounts rounded off to the nearest Rand). INFORMATION Slater Limited is looking at the possibility of investing in one of two new projects, Project A or Project B. Project A would cost R600 000, and its net cash flows are estimated to be R200 000 per year, except for the third year. The project would last for five years but would need a major overhaul costing R160 000 (not considered in the figures above) at the end of the third year. No scrap value is anticipated for this project. Project B is expected to cost R600 000 and have a useful life of six years. Annual net cash flows from this project are forecasted to be R176 000 per year. The project is expected to have a scrap value of R60 000 (not included in the figures above). The company’s cost of capital is 12%. 5.2 REQUIRED Calculate the following from the information provided below: 5.2.1 Internal Rate of Return of Project Y (answer expressed to two decimal places). 5.2.2 Return on average investment of Project X (answer expressed to two decimal places). INFORMATION Two projects are being evaluated for possible acquisition by Mobray Corporation. Forecasts relating to the two projects are as follows: Project X Project Y Initial investment R1 000 000 R1 000 000 Expected useful life 5 years 5 years Depreciation per year R200 000 R200 000 Estimated salvage value 0 0 Net cash flows: R R Year 1 300 000 220 000 Year 2 300 000 280 000 Year 3 300 000 400 000 Year 4 300 000 420 000 Year 5 300 000 200 000 The cost of capital is 15%.

Answer 1

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