Question

QUESTION 3

NOTE: Where present value tables are required, use tables with 4 decimal places.

REQUIRED
Study the information given below and answer the following questions without the use of a financial
calculator:
3.1 Calculate the Payback Period of Project B. (Answer must be expressed in years,
months and days.)


3.2 Calculate the Average Rate of Return of Project B. (Express your answer to two
decimal places.)
3.3 Calculate the Net Present Value of both projects. (Round off amounts to the
nearest Rand.)
3.4 Refer to your answers in question 3.3 and state which project should be chosen.
Give a reason for your answer. (1 mark)
3.5 Calculate the Internal Rate of Return of Project A, if the net cash inflow is
R200 000 per year for 5 years. (Express your answer to two decimal places.)
INFORMATION
Two projects are being evaluated for possible investment by Rand Limited. Forecasts relating to the
two projects are as follows:
Project A Project B
Initial investment R750 000 R750 000
Expected useful life 5 years 5 years
Estimated salvage value 0 0
Average annual profit R100 000 R144 000
Annual net cash flows: R R
Year 1 250 000 150 000
Year 2 250 000 170 000
Year 3 250 000 250 000
Year 4 250 000 400 000
Year 5 250 000 500 000

The cost of capital is 15%.

Answer 1