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QUESTION THREE [25] Laker Ltd has a choice of two projects to invest...

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Accounting

QUESTION THREE [25]
Laker Ltd has a choice of two projects to invest in. The following details relate to these projects:
Project Y
Project Z
Investment required
R1700000
R1600000
Expected economic lifetime
6 years
6 years
Minimum required rate of return
12%
12%
Net annual cash inflows
1st year
R400000
R430000
2nd year
R420000
R430000
3rd year
R440000
R430000
4th year
R580000
R430000
5th year
R520000
R430000
6th year
R460000
R430000
Required: 3.1 Use the net present value method to determine which project Laker Ltd should choose. Show all workings (19)
3.2 Justify why the net present value method (NPV) is favoured over the payback period. (6)
Present value interest factor of R1 per period for n periods, PVIF (i,n)
2
Period
12%
1
0.893
2
0.797
3
0.712
4
0.636
5
0.567
6
0.507
Present value interest factor of an annuity of R1 per period for n periods, PVIFA (i,n)
Period
12%
1
0.893
2
1.690
3
2.402
4
3.037
5
3.505
6
4.111

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