Question

INFORMATION Hattingh Limited has the option to invest in machinery in Projects A and B but finance is only available to invest in one of them. You are provided with the following projected data: Project A Project B Initial cost 500 000 500 000 Year 1 120 000 150 000 Year 2 160 000 150 000 Year 3 170 000 150 000 Year 4 180 000 150 000 Year 5 150 000 150 000 Depreciation per year 90 0000 100 000 Additional information 1. Project A machinery is expected to be disposed of at the end of year 5 with a scrap value of 50 000 (not included in the figures above) 2. Project B machinery is not expected to have any scrap value. 3. The discount rate to be used by the company is 15%. QUESTION 1 • Calculate the Payback Period of Project A (answer expressed in years, months and days). • Calculate the Accounting Rate of Return (on average investment) of Project A (answer expressed to two decimal places). • Calculate the Benefit Cost Ratio of Project A (answer rounded off to three decimal places). • Calculate the Internai Rate of Return of Project B (answer expressed to two decimal places).

Answer 1

Discounted Cash Inflow =	Actual Cash Inflow/
	(1 + i)n

Where,
   i is the discount rate =15%
   n is the period to which the cash inflow relates

Actual cash flow = 0 1 2 3 4 5

-500000 120000 160000 170000 180000 150000

PV factor = 1/(1+15%)^n   

0	1	2	3	4	5
1	0.869565217391304	0.756143667296787	0.657516232431988	0.571753245593033	0.49717673529829
-500000	discounted cash flow= 104347.826086957	120982.986767486	111777.759513438	102915.584206746	74576.5102947435
	Cumulative Discounted Cash Flow
=	-395652.173913043	-274669.187145558	-162891.42763212	-59975.8434253736	14600.6668693699

pay back period =	4+mod(-59975.84)/74576.51029	4.80421891245349
as payback comes when cummultive cash flow is zeros it is after 4 years		now .8042*12 =9.6504 months now .6504*30 =19.51days

so payback of project A=4 years 9 months 19.51 days approx