QUESTION 5
Dolby Enterprises has the option to invest in machinery inProjects M and N but finance is only available to invest in one ofthem.
| Project M (R) | Project N (R) |
Initial cost | 450 000 | 450 000 |
Net Profit | | |
Year 1 | 36 000 | 69 000 |
Year 2 | 75 000 | 69 000 |
Year 3 | 102 000 | 69 000 |
Year 4 | 129 000 | 69 000 |
Year 5 | 81 000 | 69 000 |
1. Assume that all cash flows take place at the end of the yearexcept the original investment in the project which takes place atthe beginning of the project.
2. Project M machinery is expected to be disposed of at the endof year 5 with a scrap value of R60 000.
3. Project N machinery is expected to be disposed of at the endof year 5 with a nil scrap value.
4. Depreciation is calculated on a straight-line basis.
5. The discount rate to be used by the company is 12%.
5.1 Required:
Use the information provided above by Dolby Enterprises toanswer the following questions:
5.1.1 Calculate the Payback Period of Project N. (Answer must beexpressed in years and months.)
5.1.2 Calculate the Accounting Rate of Return (on averageinvestment) of Project M.
(Answer must be expressed to two decimal places.)
5.1.3 Calculate the Net Present Value of each project. (Roundoff amounts to the nearest Rand.)
5.1.4 Using your answers from question 5.1.3, which projectshould be chosen? Why?
5.2 A machine with a purchase price of R418 000 is estimated toeliminate manual operations and save the company R130 000 cash peryear. The machine will last 5 years and have no residual value atthe end of its useful life.
Required:
Calculate the Internal Rate of Return (answer expressed to twodecimal places).
