Question

Note: Where applicable, use the present value tables provided in APPENDICES 1 and 2 that appear after REQUIRED Use the information given below to calculate the following: 5.1 Payback Period of both projects (answers expressed in years and months). (4 marks) 5.2 Accounting Rate of Return of Project A (answer expressed to two decimal places). (3 marks) 5.3 Net Present Value (NPV) of both projects (amounts rounded off to the nearest Rand). (6 marks) 5.4 Profitability Index of Project B (answer expressed to two decimal places). (2 marks) 5.5 Internal Rate of Return of Project B (answer expressed to two decimal places). (5 marks) INFORMATION Gentry Ltd had to choose between these two projects, Project A or Project B, for which the following net cash inflows have been forecasted: Year 1 2 3 4 Project A R60 000 R160 000 R200 000 R360 000 Project B R172 000 R172 000 R172 000 R172 000 Project A requires an investment of R560 000 while project Project B requires an investment of R500 000. The average annual profit of projects Project A and Project B are expected to be R55 000 and R47 000 respectively. Both projects are expected to have no salvage value. The minimum required rate of return on these projects is 12%.

Answer 1

Currency is R 5.1 Payback period Project A Project B Year Cash inflows Cash inflows 1 Cumulative Cash inflows 60,000 220,000 420,000 560,000 140,000 needed 60,000 160,000 200,000 360,000 2. 3 172,000 172,000 172,000 172,000 Payback period Payback period years 5 months 3.39 years Payback period Payback period years 11 months 2.91 years year 4 payback Cash inflow needed Total cash inflow 140,000 360,000) Payback period Initial investment Annual cash inflow 0.39 500,000 172,000 2.91 5.2 Accounting rate of return Net Income Initial investment 55,000 560,000 Accounting rate of return 47,000 9.40% 500,000 9.82% Currency is R 5.3 Net present value Year Present Value Present value factor 12% 0 1 1 0.8929 0.7972 0.7118 0.6355 Net present value Project A Cash Present inflows Value (Outflows) -560,000 -560,000 60,000 53,571 160,000 127,551 200,000 142,356 360,000 228,787 -7,735 Project B Cash inflows (Outflows) -500,000 172,000 172,000 172,000 172,000 Net present value 2 3 -500,000 153,571 137,117 122,426 109,309| 22,424 5.4 Profitablity index PV of cash inflows Initial investment Project A 552,265 0.99 560,000 Project B 522,424 500,000 1.04 Currency is R 5.5 Internal rate of return Project A Cash Year inflows (Outflows) 0 -560,000 1 60,000 160,000 200,000 4 360,000 IRR 11.48% Project B Cash Year inflows (Outflows) 0 -500,000 1 172,000 2 172,000 3 172,000 4 172,000 IRR 14.11% 2. 3