Question

QUESTION 2 (20) 2.1. Consider two projects whose cash inflows are not even. Assume that the project costs R190 000. The net cash inflows for each year is as follows: Year Project B R30 000,00 R35 000,00 R62 000,00 R75 000,00 R100 000,00 R105 000,00 Project C R95 000,00 R85 000,00 R50 000,00 R20 000,00 REQUIRED 2.1.1 Calculate the payback period of each project and recommend which project should be selected based on the payback period. (6) 2.2. Glens Ltd has a choice of investing in one of the two projects. The following details relate to these projects: Project A Project B R75 000 6 years 12% R75 000 6 years 12% Investment required Expected Economic lifetime Minimum required return of return Net annual cash inflows 1st year 2st year 3st year 4st year 5st year 6st year R20 000,00 R20 000,00 R25 000,00 R24 000,00 R30 000,00 R32 000,00 R24 000,00 R24 000,00 R24 000,00 R24 000,00 R24 000,00 R24 000,00 REQUIRED 2.2.1 Use the Net Present Value method to determine which project Glens Ltd should choose. (8) 2.2.2 Assume the initial outlay has increased to R95 000. Calculate the internal rate of return for Project B. (6)

Answer 1

Answer with working is given below

Year Project B Cumulative inflow Cash inflow -190,000 30,000 -160,000 35,000 -125,000 62,000 -63,000 75,000 12,000 100,000 105,000 Currency is R Project C Cash Cumulative inflow Cash inflow -190,000 95,000 -95,000 85,000 -10,000 50,000 40,000 20,000 2.1.1 Payback period Years Years | 3.84 (3+0.84) 2.20 (2+0.20) Project C should be selected due to lower payback period Payback working | 63,000 75,000 10,000 0.84 0.20 50,000 Currency is R 2.2 Project A Project B Year Cash inflow Present value factor at 12% Cash inflow Present value factor at 12% Present Value of Cash inflows 20,000 20,000 25,000 24,000 30,000 32,000 Present value of cash inflows Less: Initial investment Net present value UAWN 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 Present Value of Cash inflows 17,857 15,944 17,795 15,252 17,023 16,212 100,083 -75,000 25,083 24,000 24,000 24,000 24,000 24,000 24,000 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 21,429 19,133 17,083 15,252 13,618 12,159 98,674 -75,000 23,674 2.2.1 Project A should be selected due to higher Net present value Currency is R Present value of cash inflows 2.2.2 Year Project B 13% 14% WNO -95,000 24,000 24,000 24,000 24,000 24,000 24,000 13.4% PV factor 13% 1.0000 0.8850 0.7831 0.6931 0.6133 0.5428 0.4803 PV factor 14% 1.0000 0.8772 0.7695 0.6750 0.5921 0.5194 0.4556 -95,000 21,239 18,796 16,633 14,720 13,026 11,528 941 -95,000 21,053 18,467 16,199 14,210 12,465 10,934 -1,672 IRR by trial and error method IRR for Project B 1 13.4% IRR 13% 941 2,613 0.36 13% IRR 1 13.40%