Question

• 1. Smiles R’Us have just made an investment of R420 000 in the latest, most advanced dental machine on the market, details of which are below:
• Expected useful life                              7 years (straight line depreciation)
• Salvage value                                       240 000
• Cost of Capital                                      10 %
• Tax rate                                                 30%
• Expected cash flows after tax are as follows:

Year	Cash Flows	Discount factor
1	75 000	0.909
2	95 000	0.826
3	125 000	0.751
4	180 000	0.683
5	200 000	0.621
6	220 000	0.564
7	240 000	0.513

Required:

1.1.1    Calculate the payback period for the project.   

1.1.2    Determine the Net Present Value (NPV) of the project.

1.2       SNJ Wholesalers Limited is considering opening a new sales branch. Two possible sites have been identified for this purpose. Site A has an area of 30 000 square metres. It will require an average investment of R6 000 000 and will produce an average operating profit of R600 000 a year. Site B has an area of 20 000 square metres and it will require an an average investment of R4 000 000 and will produce an average operating profit of R500 000 a year.

Required:

1.2.1    Determine the accounting rate of return of each investment opportunity.

1.2.2    Which site would you select and why?         

Answer 1