Question

Medico Limited intends investing in a project during March 2021. The project is expected to cost R2 500 000 with a five-year useful life, and no residual value. The annual volume of production for the project is estimated at 150 000 units, which can be sold for cash at R12 per unit. Depreciation is expected to be R500 000 per year. Annual cash operating costs are as follows: Variable costs R225 000 Fixed costs R750 000 The cost of capital is 15%. REQUIRED Use the information provided above to calculate the following:

2.1 Net Present Value

2.2 Accounting Rate of Return on average investment (answer expressed to two decimal places)

2.3 Internal Rate of Return, if the net cash flows are R720 000 per year for five years (answer expressed to two decimal places).

Answer 1

2.1)

Annual volume =	150000 units
S.P =	12
Sales	18,00,000
Less:
V.cost =	2,25,000
Fixed cost =	7,50,000
CFAT	8,25,000
P.V.A.F @ 15% for 5 Years =	3.35
PV of CFAT =	27,63,750
Initial investment =	25,00,000
Net Present value =	2,63,750

2.2)

Accounting Rate of Return on average investment =	Average net profit / Average investment	*100
Average net profit =	CFAT - depreciation
Average net profit =	825000-500000
Average net profit =	3,25,000
Average investment =	(2500000+0)/2
Average investment =	12,50,000
Accounting Rate of Return on average investment =	26.00%

2.3)

IRR is a rate where Net cash inflows = cash outflows
i.e.
25,00,000 = 720000 * PVAF
PVAF = 2500000 / 720000
PVAF =	3.472222222
Rate =	"=RATE(5,-1,3.4722,,0)"	type in excel
Rate =	13.53%

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