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Coca-Cola is considering upgrading its plant to expand it client base. The financial details of...

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Finance

Coca-Cola is considering upgrading its plant to expand it client base. The financial details of the investment proposal are as follows:

Cost of plant R4 700 000 Import duty R 900 000 Installation cost R 450 000 Net cash flows Year 1-8 R1 700 000 per annum (excluding residual value) Residual/scrap value R1 300 000

The company uses straight-line depreciation. The cost of capital for projects of similar risk is 18%. Ignore taxation.

a) Calculate the investments Accounting Rate of Return (ARR).

b) Briefly explain if the ARR is acceptable or not based on a target rate of return of 25%.

c) Assume a payback period of 3 years. Determine the payback period and state if the investment is acceptable or not.

d) Calculate and comment on the viability of the proposed investment based on the net present value (NPV) method. e) Discuss whether the advantages of using the NPV method outweigh the disadvantages.

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