Question

NOTE: Where present value tables are required, use tables with 4 decimal places. REQUIRED Study the information given below and answer the following questions: 2.1 Calculate the Payback period of Nik and Nak Equipment. (Answer must be expressed in years, months and days.) 2.2 Calculate the Accounting Rate of return (on average investment) of Nak Equipment (answer expressed to two decimal places). Calculate the Net Present Value of Nik Equipment. (Round off amounts to the nearest Rand.) Calculate the Internal Rate of Return of Nak Equipment (answer expressed to two decimal places). 2.3 2.4 Caloo

Answer 1

a.

payback period means you will get your invested money in that period it ignores time value of money

Payback period = cost of equipment or investment / annual cash flow

Total investment = 1000000

Payback period

for nik = 1000000 - 440000 - 420000 = 140000

Here 2 full year + 140000/300000 year = 2 year+ 0.46 year= 2.46 year or 2 years 5 months 18 days

for nak = 1000000 - 288000 -288000 - 288000  = 160000

Here 3 full year + 160000/288000 year = 3 year+ 0.5555 year  = 3.5555 years or 3 years 6 months 20 days

b.

Accounting rate of return = Average annual profit / total investment.

for nik = 128000 / 1000000 = 0.128 = 12.8%

avg annual profit = total profit / no of year = (240000+220000+100000-20000+100000) / 5 = 128000

for nak = 88000 / 1000000 = 0.088 = 8.8%

avg annual profit = total profit / no of year = (88000+88000+88000+88000+88000) / 5 = 88000  

c.

first, find total present value

Total present value = CF1 / (1+r)¹ +  CF2 / (1+r)² +  CF3 / (1+r)³ + CF4 / (1+r) +  CF5 / (1+r)⁵

where,

CF = cashflow

r = require rate of return

Total PV For nik =   440000 / (1+0.12)¹ + 420000 / (1+0.12)² + 300000 / (1+0.12)³ + 180000 / (1+0.12)⁴ + 100000 / (1+0.12)⁵ = (440000/1.12) + (420000/1.2544) + (300000/1.4049) + (180000/1.5735) + (100000/1.7623) = 392857+ 334821 + 213534 +114393 + 56742 = 1112347

Total pv for nak = 288000 / (1+0.12)¹ + 288000 / (1+0.12)² + 288000 / (1+0.12)³ + 288000 / (1+0.12)⁴ + 288000 / (1+0.12)⁵ = (288000/1.12) + (288000/1.2544) + (288000/1.4049) + (288000/1.5735) + (288000/1.7623) = 257142+ 229591 + 204996 +183031 + 163422 = 1038185

Ner present value = Total present value - initial invetment or equipment cost

NPV For nik = 1112347- 1000000 = 112347

NPV for nak = 1038185 - 1000000 = 38185

d.

use excel for IRR calculation

for nik

= irr ( -1000000,440000,420000,300000,180000,100000)

irr =17.64%

for nak

= irr ( -1000000,288000,288000,288000,288000,288000)

irr =13.53%

or use can find by trial and error method using formula

nik

1000000=   440000 / (1+irr)¹ + 420000 / (1+irr)² + 300000 / (1+irr)³ + 180000 / (1+irr)⁴ + 100000 / (1+irr)⁵

for nak

1000000 = 288000 / (1+irrr)¹ + 288000 / (1+irr)² + 288000 / (1+irr)³ + 288000 / (1+irr)⁴ + 288000 / (1+irr)⁵