50.1K

Verified Solution

Link Copied!

QUESTION $5$

$(20$ Marks$)$

Note: Where applicable, use the present value tables provided in APPENDICES $1$ and $2$ that appear after the formula sheet.

REQUIRED

Use the information provided below to answer the following questions:

$5\mathrm{.}1$ Calculate the Payback Period of the first alternative $($expressed in years, months and days$).(3$ marks$)$

$5\mathrm{.}2$ Calculate the Accounting Rate of Return on initial investment of the first alternative $($expressed to two decimal places$).(4$ marks$)$

$5\mathrm{.}3$ Based on the Net Present Value, which alternative should be chosen? Why? $($Show the calculations of the present values as well as the net present values.$)(8$ marks$)$

$5\mathrm{.}4$ Calculate the Internal Rate of Return $($expressed to two decimal places$)$ of the first alternative. Your answer must include two net present value calculations $($using consecutive rates$/$percentages$)$ and interpolation. $(5$ marks$)$

INFORMATION

The management of Torga Limited is considering two investment opportunities:

The first alternative involves the purchase of new machinery for R$1200000$ which will enable the company to modernise its production facility. The machinery is expected to have a useful life of five years and no salvage value is anticipated. On the day Torga Limited purchases the new machinery, it would also pay the supplier R$60000$ for installation costs. The modernisation is expected to increase efficiency, resulting in a reduction in annual cash operating expenses of R$380000.$

The second alternative involves purchasing a truck. The truck costs R$1200000.$ Its useful life is expected to be five years and a salvage value of R$300000$ is anticipated. Operating the truck will necessitate an increase of R$60000$ in the company's working capital base immediately upon buying the truck. The working capital cash outflow is expected to be recovered at the end of the truck's useful life. The truck is expected to generate R$730000$ per year in additional cash revenues. The driver's salary and other cash operating expenses are expected to be R$360000$ per year.

Torga Limited desires a rate of return of $12\%.$ The straight$-$line method of depreciation is used. Ignore taxes.

Answer & Explanation Solved by verified expert

See Answer